Gifts through stockbroker are included in donor's estate.

In Est. of Cummins, TC Memo 1993-518, the Tax Court ruled that 20 $10,000 gifts made through a taxpayer's stockbroker were not complete when the taxpayer died before the stockbroker issued the checks--even though the taxpayer had given him irrevocable written instructions to make the gifts. Therefore, the $200,000 was included in the taxpayer's gross estate.

Sec. 2503(b) excludes the first $10,000 of gifts of present interests per calendar year to any donee from gift tax. However, these gifts must be completed gifts in the particular calendar year, as determined by state law. Required for completeness in most states (including Oregon, the state of Cummins, residence) are the intent to make a gift, delivery to the donee and aeceptance. Delivery requires the transfer of possession and control such that the donor relinquishes the power to revoke the gift.

On Oct. 4, 1988, Cummins wrote a letter to his stockbroker at Shearson. Referring to a discussion they had had a month earlier, the letter stated: " . . . you are hereby given the irrevocable instruction to pay the sum of $10,000 each, in cash, to the following named individuals . . . ." (Emphasis in original.) The letter also instructed Shcarson to liquidate a sufficient amount of securities to accomplish this. It concluded that the gifts would be "complete and irrevocable" when he signed the letter. Cummins, attorney immediately delivered the signed letter to Shearson, which accepted its terms. Later that day Cummins died. Following the sale of Cummins, securities on October 5, Shearson reduced Cummins, account by $200,000 and issucd checks to the donees on October 6 drawn on Shearson's account.

The Tax Court found the intent and acceptancc rcquirements for a completed gift to be present, with the only issue being whether or not delivery was accomplished. The answer to this question depended on whether Shearson was an agent of Cummins or a trustee for the beneficiaries. An agent acts on behalf of a principal, who retains ownership of the assets, while a trustee takes ownership of the assets and acts on behalf of the beneficiaries.

The IRS argued that, since the money was not transferred to the donees until after Cummins, death, the gifts were not complete and therefore were includible in his estate. The estate contended that the irrevocable nature of Cummins, letter to Shearson created a trust relationship, and that the delivery of the letter to Shearson as trustee satisfied the delivery requirement. Therefore, the gifts were complete on October 4 before Cummins died.

The Tax Court agreed that if a trust relationship had been created instead of Shearson simply being Cummins, agent, the gifts would be complete on Shearson's receipt of the letter. However, the court pointed out that a stockbroker is typically an agent of the customer, who is the principal. The court then ruled that, in order to create a trust, thc taxpaycr must clcarly indicatc an intcnt to create a trust and specify the trust property; using thc word "irrevocable" in thc lcttcr was insufficient in itself to create a trust. Sincc therc was no evidence of the required intent on Cummins, part in eithcr his relationship with Shcarson or in thc drafting of thc lcttcr, no trust was creatcd. Finally, thc court notcd that evcn if Shcarson had lcgal title to Cummins, sccuritics (i.e., if they were held "in street name"), this would not change the relationship from agcncy to trust. Consequently, Cummins, gifts wcre not complctc and thcrcforc were included in his estate.

In an earlier case, the Tax Court has explicitly ruled that checks issued to donees drawn on a broker's account prior to the donor's death were completed gifts, since the donee no longer had the power to revoke the gifts after issuance (Est. of Gagliardi, 89 TC 1207 (1987)). (Such checks are covered by the same rule as cashier's checks issued by a bank, which are also irrevocable by the donor and completed gifts when issued by the bank.) Applying this ruling to Cummins, the gifts would have been completed on October 6 had Cummins lived. Also in Gagliardi, checks drawn on a donor's bank account payable to noncharitable donees were not completed gifts until paid by the donor's bank because they wcre revocable until paid. (Gifts to charitable donees are completed when mailed.) In Est. of Metzger, 100 TC No. 14 (1993), the Tax Court ruled that gifts were complete in 1985 when noneharitable donees deposited the donor's checks into their savings accounts on December 31 even though the checks were not paid by the donor's bank until Jan. 2, 1986. It is uncertain whether the court would extend Metzger to checks outstanding at the donor's death.

Cummins could have avoided this whole problem if he had acted sooner. (Clearly there was time, since he had discussed the matter a month earlier with his stockbroker.) The best strategy to ensure that gifts are complete both before death and before the end of the year is to make gifts early in the year. This is particularly important in light of the currcnt political climate, because Congress may enact legislation to limit the $10,000 annual exclusion. Stockbroker's or cashier's checks should be used since they are completed gifts when issued. As a further precaution, a power of attorney can be given to a younger relative to make gifts if the donor becomes incapacitated. The power of attorney could also specify that the list of donees should be expanded in the event of such incapacitation.

From Peter C. Barton, CPA, MBA, J.D., CPA, and Roy C. Weatherwax, CPA, Ph.D., College of Business and Economics, University of Wisconsin-Whitewater, Whitewater, Wisc.