Reducing Your Taxable Estate

by: Bonfiglio & Asterita, LLC.
Bonfiglio and Asterita, LLC NY Attorneys at Law
Bonfiglio and Asterita, LLC NJ Attorneys at Law

Giving away money to reduce your taxable estate is a common strategy to reduce estate taxes. But in order to be valid, the gifts must be “complete” by the time the donor dies – meaning that checks must have been written and paid by the bank.

Worst case scenario: Just before death, a person makes a series of gifts to reduce his or her taxable estate. IRS auditors question the validity of the “deathbed gifts” and declare them “incomplete.” The money is put back in the donor’s taxable estate and the IRS adds penalties and interest.

Here’s a court case that illustrates how a donor’s final wishes can be ignored in this way if gifts aren’t handled properly.

Mary Rosano wrote checks to numerous friends and relatives shortly before her death. Each check was for less than the annual tax-free gift limit, (which was $10,000 at the time but has been increased to $14,000 for 2013/$13,000 for 2012).

Taxable Estate

Although the checks were written and delivered to the recipients before Rosano’s death, they were not paid by the bank until afterward.

The amount of the checks was not included in Rosano’s taxable estate by her executor. In an IRS audit, the value of the estate was increased by the amount of the checks and an additional tax bill was imposed of nearly $400,000 in taxes, penalties and interest.

The IRS insisted the gifts were not complete because Rosano still had “dominion and control” over them. The district court and the Second Circuit Court of Appeals agreed. Since Rosano had the ability to “stop payment” at any time until the checks were paid, she retained dominion and control. Therefore, the gifts were not complete until after her death. (Rosano v. United States, 87 AFTR2d 2001-1619)

Best advice: To avoid similar disputes, donors should try to make gifts sooner while they’re healthy — rather than later, when they’re ill. Make sure recipients deposit any checks immediately. Better yet, use cash, certified checks or cashier’s checks instead of bank checks. They constitute completed gifts as soon as they are issued and delivered to recipients. Why? Once issued, a donor can’t stop payment.

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