Major Estate Tax Change Looming – Don’t Be A Last Minute Louie

for the umpteenth time in December will have as much as $5,120,000 protected from estate tax.  For somebody who checks out while watching the Rose Bowl

the estate tax kicks in at $1,000,000, if the law does not change between now and then.

I have discussed elsewhere the probability of this scenario unfolding, some techniques that can be used to juice up the $5,120,000 and the pitfalls of those techniques.  What I want to do in this post is point out the perils of procrastination.  The example I have constructed is contrived and unrealistic, but I am hoping that it will drive home the point that even the simplest estate plan can be ruined by procrastination.  The story is based on the assumption that the estate tax law will not be changed, which means the unified credit equivalent will plummet on January 1, 2013.  With no further ado, here is:

The Sad Tale Of Last Minute Louie

Last Minute Louie, as his nickname indicates, never put off till tomorrow what he could put off till next week.  His estate plan, which he devised himself was kind of interesting.  He had a large windfall, which had made him fairly wealthy.  He had meant to invest it, but never got around to it.  So he had $5,200,000 sitting in his checking account, when his doctor told him in October of 2012 that he only had a few months to live.  His needs were modest so he decided that he would give his only child, Louie Jr, $5,120,000, but, it only being October, he had plenty of time.

I could string this out like a shaggy dog story, but I will spare you.  Last Minute Louie finally gave Louie Junior a check for $5,120,000 at noon on December 31, 2012.  Louie Junior deposited the check at 10:00 AM on January 2, 2013.  Last Minute Louie died at noon on the same day.  Louie Junior, not a procrastinator, saw that his father’s final income and gift tax returns were filed timely.  Louie’s remaining assets were eaten up by bills he had not gotten around to paying so nobody bothered with an estate tax return.

Was Louie Junior ever shocked when he was assessed a couple of million dollars for transferee liability on Louie Senior’s estate ?  How could that be ?  Under the laws of the state that Louie Senior lived in, Louie Senior had the right to stop payment on the check.  Until Louie Junior actually took possession of the funds, the gift was incomplete.  The facts in the case of McCarthy V United States, a Seventh Circuit decision, are a little different but the principle is clear.  I have run this scenario by some other practitioners and will give you their comments, but first the moral.

The Moral Of The Story – Don’t Be A Last Minute Louie

Louie’s plan was simple and effective, but his procrastination and inattention to one tiny detail may have defeated it.  Your estate planning with respect to a 2012 mega gift will probably have even more wrinkles than Last Minute Louie’s.  Competent estate planning professionals will be in short supply this December.  If you want things done right, get moving now.

You can follow me on twitter @peterreillycpa.

If you are an estate planning junkie, you may want to read the epilogue, which gets into whether or not Louie Senior’s gift was complete.

Epilogue – Is Louie Junior Doomed ?

I ran the scenario by a few other people, one of whom helped me refine it a bit.  Here are some comments.

Annette Nellen 21st Century Taxation

Well, that’s a good story.  I think they should have done something better to be sure the funds were transferred on 12/31.  Couldn’t they use the free wifi in the hospital, log onto the accounts and transfer the funds electronically? Sounds like part of the issue is whether Louie had funds on January 2 because the funds were transferred to the estate.  Perhaps the fact of a check dated 12/31/12 might show that the funds were intended to be transferred.  Still think they should have tried harder to have an actual transfer.

Hospital wifi ! Why didn’t I think of that ?  If you are planning on deathbed gifts, make sure that you check into a hospital that has wifi.

Off The Record

OTR, a seasoned estate attorney, wrote:

I believe there is case law on this hypothetical.  Gift tax law 101 says that in order for there to be a gift there has to be delivery and acceptance. The issue is whether Jr. taking the check from his father (and not returning it) was sufficient to constitute acceptance effective on the date of delivery or the check or whether acceptance did not occur unless/until he deposited the check in his account.  Isn’t there some analogous case law in the charitable contribution context about whether a check written and mailed on 12/24/11 and received by the charity on 12/30 but not deposited until 1/3/12 constitutes a 2011 or 2012 charitable gift?  In the gift tax context, Sr. had done everything he could to “perfect” his gift as of 12/31 by delivering the check to Jr. and also by not stopping payment on it (although arguably he could not have stopped payment even if he had wanted to due to the holiday, but on the other hand he also made no indication to Jr that he wanted to cancel the check, and he could have done so before he died). In addition, Jr. accepted the check upon delivery and did not return it. I don’t think the fact that Jr. delayed depositing the check until 2013 should affect the result, especially since he was unable to deposit it since the banks were closed (although he theoretically could have run down to his ATM machine and deposited it electronically).   Should this situation be any different than if I physically gave you stock certificates registered in my name and in my possession on 12/31, and you then delivered them to your broker on 1/3 to register into your account with your broker?  I would argue that the gift should still be valid when delivery is made notwithstanding the fact that the donee needs to take some subsequent action to title the gifted asset into his name.  In my mind, possession should trump perfection of title for gift tax purposes….. As we used to say in law school, good hypo!

 Matthew Erskine – The Last Word For Last Minute Louie

Mr. Erskine commented on my initial version of the scenario, which had Louie Senior dying on January 1:

This is covered by the “Self Reference” rule. A gift to a noncharitable donee that is made by check is complete on the earlier of: The date on which Louie parted with “dominion and control” under local law as to leave him no power to change its disposition, or the date on which Louie Jr. deposits the check (or cashes the check against available funds of Louie) or presents the check for payment, if it is established that: (1) the check was paid by the drawee bank when first presented to the drawee bank for payment; (2) Louie was alive when the check was paid by the drawee bank; (3) Louie intended to make a gift; (4) delivery of the check by Louie to Louie Jr. was unconditional; and (5) the check was deposited, cashed, or presented in the calendar year for which completed gift treatment is sought and within a reasonable time of issuance. (most states say 30 days is a reasonable time.) So, it is a question of fact whether, under local law, Louie Sr. parted with “dominion and control” as to leave him no power to change its disposition when he gave the check to Louie Jr. on the 31st.  Arguably yes, since when Louie Sr. gave Jr. the check, Sr. knew that, since the banks where closed New Year’s Eve and New Years Day, he (temporarily) had no power to change its disposition until the banks opened on the Second.  His intervening death on the First makes it permanent, so the gift was made 12/31/2012 (arguably) not 1/2/2013.

When I asked Mr. Erskine if Louie making it past the opening of banking on January 2 would make a difference, he indicated that he thought it would so I revised the scenario.

The bottom-line to this discussion is that you don’t want to have a plan that ends up in a gray area, when there is no good reason for it.

Originally published on Forbes.com Oct 26th, 2012