What Is a Completed Gift for Tax Purposes?
According to U.S. Treasury regulations, a completed gift entails the transferral of property from a donor to recipients without the donor retaining a testamentary power of appointment (POA) that maintains control over the gift following the donor’s death. Knowing the difference between a completed gift and an incomplete gift can help better determine how to navigate trusts.
When Gifts Aren’t Completed
Treasure regulations under federal law dictate that gifts are only completed when donors no longer have any control over them, without maintaining any POA. If the donor retains control over the gift, which could entail paying checks included in a gift after the donor has died, the U.S. Internal Revenue Service (IRS) is likely to argue that the gift was incomplete, even if the estate claims it is.
In one case tried before the Second Circuit Court of Appeals, the court held that a woman could not reduce an estate by writing checks to loved ones because they weren’t paid until after she died, rendering them incomplete.
The specific case involved Mary Rosano, who wrote several checks to family and friends for less than $10,000 each. While she wrote these checks when she was alive, the money did not go through until her passing. Subsequently, an IRS audit increased the overall estate value based on the amounts disclosed in the checks, leading to an increase in taxes of around $300,000 and penalties/interest of nearly $100,000.
How the Relation-Back Doctrine Works
The estate claimed that the gifts were completed despite the checks’ delayed payment. At the same time, the estate claimed that the relation-back doctrine applied to this case. This doctrine mandates that checks delivered to charities while the donor is alive but not paid until after the donor’s death qualify as completed gifts upon delivery.
The Second Circuit held that not only were Rosano’s gifts incomplete because she had the power to stop payments up to the time those checks were paid, but also that the relation-back doctrine didn’t apply. The reasoning here was that the doctrine applied to charitable situations because a charity donation would result in a reduction of the estate, while there isn’t any offsetting deduction for noncharitable donees.
If a donor wishes to ensure that gifts are completed, he or she must avoid retaining POA over the gift to render it complete.