How Does Timing Affect Gifts and State Estate Taxes?
I have 3 questions about the timing and documentation of gifting: 1. If gift checks were written in 2018, but not cashed until 2019, in what year are they counted? 2. If gift checks were written in 2018 or 2019 prior to my father’s passing, but none were cashed before his passing, will they be counted in reducing his taxable estate? (I already know I will be filing an estate tax return, I am just trying to see if the gifts will be counted towards reducing the final taxable amount.) And perhaps most importantly, is a written and dated check sufficient documentation to confirm the amount, and the date, of gifting?
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I’m going to give you two somewhat contradictory answers. But first, to set the stage, I assume you’re talking about state, not federal, gift and estate taxes since your father would have to give away over $12.06 million (in 2022) to incur any federal gift or estate tax.
I’ll tell you how Massachusetts works both as an example and since that’s where I practice, I know its system best. (You can check here to see if your state has an estate tax.) Massachusetts has an unusual gift and estate framework. It doesn’t have a gift tax, but taxable gifts are included back in the estate to determine whether it exceeds the $1 million threshold for estate taxation. For instance, an estate would be taxable even if it totaled only $800,000 if the decedent had given away $300,000 in taxable gifts during his life, since the total of the two amounts exceeds $1 million.
Taxable gifts are those over $16,000 to any individual during a calendar year. Turning to your first question, this could be relevant if someone made gifts in both 2018 and 2019 and wanted the $16,000 exclusion to apply to both. In most cases, taxpayers will simply look to the date on the check they write to determine whether they need to file a gift tax return and the amount claimed. They won’t track when the recipient actually cashed the check. So, for instance, a mother who gave each of her children $16,000 a year every December wouldn’t bother to look at whether two of the checks happened to have been cashed during the same calendar year and then feel an obligation to file a gift tax return if that were the case.
But, turning to your second question, what if your father wrote everyone a $16,000 check in December and then followed up quickly with $16,000 checks at the beginning of 2019, but none were cashed before his death? Even though no gift tax return would need to be filed, and there would be no amount of taxable gifts to add back into his estate to determine whether it exceeded the $1 million threshold, his estate could still be taxable. That’s because, for estate tax purposes, the total value of his accounts on the date of death must be reported. The accounts would still hold the funds represented by the uncashed checks and if, as a result, his estate totaled more than $1 million, it would be taxable.
Finally, to answer your third question and as is indicated by the analysis above, the date on the check should be fine for gifting purposes, but outstanding checks are not deducted from the value of accounts on the date of death.