Lifetime gifts are a popular way to reduce estate and inheritance taxes. Currently, only estates worth $13.99 million or more in 2025, and $15 million in 2026, are subject to the federal estate tax. Twelve states and the District of Columbia levy an additional estate or inheritance tax.
To lower their taxable estate at death, an individual may consider giving gifts to friends and family members. The timing and form of gifts have essential estate planning implications, however, as a recent opinion from the United States Court of Appeals for the Third Circuit demonstrates. In that case, the failure to complete gifts in the form of checks before the donor'’ death cost his estate—and ultimately his heirs—a significant sum
Case Summary
William DeMuth, Jr., of Pennsylvania, executed a power of attorney (POA) in January 2007, appointing his son, Donald DeMuth, as his agent. In this capacity, Donald made annual monetary gifts to family members from 2007 to 2014.
On September 6, 2015, shortly after William was diagnosed with an end-stage medical condition, Donald signed and delivered seven checks to family members worth $464,000. William passed away on September 11, 2015. At the time of his death, just one of the eleven checks had been paid from his account. Ten of the eleven checks, totaling $436,000, had not been paid before William's death, although three of them were deposited on the day of his death.
Donald, the executor of William's estate, excluded the value of all eleven checks from William's account when reporting the gross estate. The Internal Revenue Service (IRS), however, concluded that the account's value had been underreported by $436,000, the amount of the ten checks, and issued a notice of estate tax deficiency for $179,130.
Donald filed an appeal with the Tax Court, where the IRS agreed to exclude the three checks deposited on the day William died. This reduced the tax deficiency to $131,774, but the Tax Court held that the funds from the remaining seven checks were part of William's estate because, under Pennsylvania law, they were not completed gifts before his death.
The estate appealed to the Third Circuit, arguing that the gifts were completed gifts in contemplation of William's death, and as a result were completed gifts in "causa mortis." In Pennsylvania, gifts causa mortis differ from gifts inter vivos (i.e., a gift or transfer made during someone's lifetime). A gift by check, deemed a gift causa mortis, is complete when the check is delivered to the recipient, not when the recipient deposits it.
Donald lost the appeal, with the court ruling that the estate did not show William wrote the checks as gifts in causa mortis. "Thus, the value of the seven remaining checks was improperly excluded from the gross estate," the court concluded. [1]
Estate Planning Takeaways
The outcome of the seven checks being included in William's estate is that the estate tax increased by more than $130,000. Then, there were the estate's legal and court fees paid to litigate the case in a losing effort, on top of nearly eight years of dealing with the courts and the IRS.
With better planning, the money paid in taxes and court costs could have been passed on to Donald and other heirs. The federal estate tax amount was also likely in addition to taxes owed in Pennsylvania, which imposes an inheritance tax that ranges from 4.5 to 15 percent on eligible transfers. [2]
Other estate planning takeaways from DeMuth v. Commissioner include the following:
1. If the deathbed gifts made by Donald DeMuth on behalf of his father had been made by a bank check or wire—rather than a personal check—they could have been excluded from the taxable estate because a bank check or wire represents funds already withdrawn from the payer's account.
2. The US Code and Treasury Regulations were relevant to DeMuth v. Commissioner, but state law governs property law. Relevant to this case, the distinction in Pennsylvania law between gifts inter vivos and gifts causa mortis was critical.
3. Knowing that his father was in poor health, Donald should have ensured that the gift checks were received and deposited before William died.
4. A similar mistake is made when checks are written at the end of the year to take advantage of the annual gift exclusion ($17,000 per person in 2023). If the check is not cashed or deposited by year-end, it is not considered complete until the following year and, therefore, is not a gift made in the year the check is written. This could result in a doubling of gifts, the filing of a gift tax return, and a reduction in the lifetime exemption amount.
5. State tax laws should also be considered when timing gifts. Pennsylvania, for example, does not have a gift tax, but all gifts greater than $3,000 made within 12 months of the decedent's date of death are pulled back into the estate and subject to Pennsylvania inheritance taxes. [3]
Putting Off Estate Planning Can Have Unintended Consequences
DeMuth v. Commissioners is a lesson in what can happen when estate planning is put off to the last minute. Gifting can be an effective way to reduce estate and inheritance taxes and leave more money to heirs—but to maximize the unified estate and gift tax exclusions, it should be a long-term strategy.
Today's all-time high exclusion levels are set to be cut in half in 2026. With this drastic change on the horizon, families may want to revisit their estate plan now and consider actions such as creating a family trust. An estate plan should also account for expected asset appreciation that could put an estate over the exemption amount come 2026.
Even if you do not think upcoming changes in the tax law will affect your estate plan, it is still essential to review your plan every few years. Changes in your life and the lives of loved ones can make it necessary to modify your will or trust terms or reconsider trustees and executors. Like William DeMuth, you could also face a terminal medical condition that forces you to accelerate certain aspects of your plan.
Whatever your plan is, do not delay taking the necessary steps to make it official. Putting off estate planning can affect your estate, your heirs, and your legacy. When your plans change, our attorneys are here to help. Call or contact us to schedule an appointment.
If a loved one has recently passed and you are unsure what to do, please contact us so we can help you restore stability and clarity to your life. Click here to schedule a meeting.
Footnotes
[1] DeMuth v. Comm'r, No. 22-3032 (3d Cir. July 10, 2023), https://law.justia.com/cases/federal/appellate-courts/ca3/22-3032/22-3032-2023-07-12.html
[2] Pa. Dep't of Revenue, Inheritance Tax, https://www.revenue.pa.gov/TaxTypes/InheritanceTax/Pages/default.aspx (last visited October 27, 2023)
[3] Inheritance Tax, Art. XXI § 2107(c)(3), https://www.legis.state.pa.us/cfdocs/legis/LI/uconsCheck.cfm?txtType=HTM&yr=1971&sessInd=0&smthLwInd=0&act=002&chpt=21
