Kelly A. Burgy
Why Deathbed Planning Might Give You Additional Grief
None of us likes to think about our own death or enjoys planning for that occasion. However, if you do not create an estate plan or fail to update it regularly, you are likely setting your loved ones up for even more stress and grief after you pass away. It may add to your own stress and impede your peace of mind during your lifetime because of the uncertainty that your wishes and goals will be fulfilled. If you have not updated your estate plan to include loved ones who are not provided for in your existing plan, you may be tempted to make deathbed gifts. It may bring you pleasure to make significant gifts to loved ones because of the joy it may bring to them. However, in addition to the obvious problem that none of us knows the exact time we will die and may not be able to make the deathbed gifts we intend, there are some other drawbacks to deathbed planning that you may not have thought about.
Lack of Basis Adjustment
Although it may seem special and meaningful to provide a gift to a loved one as your last act, it may come with significant costs to them. Under federal tax law, a capital gain occurs if property is sold or exchanged for more than its original price. The original price is called its basis. If you make a gift during your lifetime, even one minute prior to your death, the recipient of your gift will have the same basis you had: this is called a carryover basis. However, if the same person inherits the property after your death, the basis of the property is generally its fair market value at the time of your death: this is called a basis adjustment. This is important because if the value of the property increased over time, it will likely be worth more at your death than it was when you bought it, perhaps many years ago.
Example: If, on your deathbed, you decide to give your son a valuable painting you purchased in 1975 for $20,000 that is currently worth $150,000, the painting has appreciated in value by $130,000. Your son’s carryover basis in the painting is the same as yours—$20,000. As a result, if your son decides not to keep the painting and sells it for $150,000, the increase in value of $130,000 will be taxable as capital gain to him. In contrast, if your son inherits the painting at your death, his basis will be stepped up to $150,000, its fair market value on the date of your death. If he immediately sells it, he would have no capital gain, and thus, would benefit from significant tax savings.
Possible Inclusion in Your Gross Estate
If you have a very large estate, you may be tempted to make lifetime gifts as a way of decreasing the size of your estate and minimizing your liability for estate taxes. However, if you wait until you are on your deathbed to make those gifts, they will still be included in your estate under some circumstances because they are not considered “completed” gifts under federal tax law. A recent case, Estate of DeMuth v. Commissioner, dealt with a situation in which a father’s health began to worsen. His son, as his agent under a power of attorney, wrote eleven checks on September 6, 2015, from his father’s investment account totaling $464,000 to different recipients in an effort to take advantage of the annual gift exemption ($14,000 in 2015). The father died on September 11, 2015. Some of the recipients had deposited their checks before the father’s death, but some had not.
Treasury Regulation § 20.2031-5 provides that the “amount of cash belonging to the decedent at the date of his death, whether in his possession or in the possession of another, or deposited with a bank, is included in the decedent’s gross estate.” The Tax Court found that under Pennsylvania law, which was applicable to determine when the gift of a check was a completed gift, delivery of a check does not complete the gift. Instead, only checks deposited by the recipients before the father’s death and credited to the their bank were completed gifts, and those that were not deposited or paid by the investment company should be included in the father’s estate because he (or his son as his agent) could have stopped payment on those undeposited checks until his death. Estate of DeMuth highlights the importance of planning ahead rather than waiting until the last moments or days of life to make a gift, particularly if the goal is to reduce your estate tax liability.
Although gifts made within three years of your death are generally includible in your estate, there is an exception if a gift tax return was not required to be filed because the value of the gift was less than the annual exclusion amount. Transfers relating to life insurance policies, however, are an exception to this exception.
Doubts about Your Capacity
To make a valid gift, you must have the mental capacity required by state law, but those standards vary by state. In some states, it is the same standard that must be met to make a valid Will: (1) you must have a general understanding of what type and how much property you own, (2) you must understand to whom you plan to give the property, and (3) you must understand that the gift transfers the property. In some states, it may also be necessary for you to have an understanding of the effect of the gift on your future financial security.
If you make a gift on your deathbed, other heirs who may have inherited the property if the gift had not been made and who disagree with your decision may question your mental competency to make the gift. Although the mere fact that a gift was made on your deathbed is not enough on its own to show that you lacked the capacity to make the gift, there may be other factors that call the validity of the gift into question: Could your medical condition at the end of your life cause your mental capacity to decrease? What if you are taking medications immediately prior to your death that could impede your understanding?
We Can Help You Plan Ahead
The downsides of deathbed planning can outweigh any benefits you may think it will achieve, so it is prudent to consult an experienced estate planning attorney when considering any plan involving lifetime gifts. In addition, creating an estate plan designed to achieve all of your goals or updating an old plan that is no longer in line with your wishes will spare your family members and loved ones discord and can help them avoid tax bills. In addition, you will have the peace of mind that comes with knowing that your intentions will be carried out. Give us a call so we can assist you in planning ahead to avoid additional grief for you and your family.
 See I.R.C. § 2035(c)(3); Treas. Reg. § 25.2511-2(b) (“[I]f upon a transfer of property (whether in trust or otherwise) the donor reserves any power over its disposition, the gift may be wholly incomplete, or may be partially complete and partially incomplete, depending upon all the facts in the particular case.”).  124 T.C.M. (CCH) 22 (2022) (appeal filed).  In re Mellier’s Estate, 182 A. 388, 389 (Pa. 1936).  Several of the checks that the Internal Revenue Service (IRS) had mistakenly conceded were not included in the father’s gross estate were excluded from it. But for the IRS’s mistake, the amounts of those checks also would have been included.  I.R.C. § 2035(a).  I.R.C. § 2035(c)(3).