Attempting a Weekend Taxable Gift of Securities from a Brokerage Account (If You Must)

By Paul M. Cathcart Jr.

Paul M. Cathcart Jr. is an attorney with Hemenway & Barnes LLP, Boston, Massachusetts.

Attempting a Weekend Taxable Gift of Securities from a Brokerage Account

In this article, guidance is offered regarding attempting to complete a taxable gift of securities, held in a brokerage account, before the gift can be reflected on the broker’s books. In the process, some of the governing law is identified to give the reader a foundation from which to answer other questions involving brokerage accounts. The author concludes that a declaration of trust, immediately followed by a conforming directive to the broker, labeled “irrevocable,” is generally the surest approach.

No On-Point Guidance

The question might be posed generally: When is an in-kind taxable gift from a brokerage account complete? The question typically seems trivial: The donor directs the gift, the broker debits the donor’s account as of a certain business day, and the gift is treated as complete on that day. But suppose the donor wants to complete the gift before the debit occurs. For example, the donor may wish to complete the gift over the weekend if higher selling prices are foreseen in the coming week. See generally Treas. Reg. § 25.2512-2. Or the donor may be seeking to reduce the donor’s putative gross estate, for state estate-tax purposes, via a deathbed gift. (Completion of a taxable gift typically reduces the donor’s putative gross estate, and some state estate-tax calculations—unlike the federal estatetax calculation—generally ignore lifetime gifts. See, e.g., Mass. Gen. Laws ch. 65C, § 2A.) Can it be done?

Research quickly leads to the following on-point guidance regarding when a taxable gift of stock, at least, is complete:

If a donor delivers a properly indorsed stock certificate to the donee or the donee’s agent, the gift is completed for gift tax purposes on the date of delivery. If the donor delivers the certificate to his bank or broker as his agent, or to the issuing corporation or its transfer agent, for transfer into the name of the donee, the gift is completed on the date the stock is transferred on the books of the corporation.

Treas. Reg. § 25.2511-2(h); see also Estate of Davenport v. Comm’r, 184 F.3d 1176, 1186 (10th Cir. 1999) (regulation not exhaustive).

The problem is that this guidance presupposes the donor’s possession of certificates evidencing ownership of the securities in question. The donor likely would have possessed those certificates in 1958 when the above-quoted guidance was first finalized, but that is not true today, at least if the securities are publicly traded. See generally U.C.C. art. 8 prefatory note pt. I (1994). For one thing, not all securities are “certificated”; ownership of some is evidenced only in the records of the issuer or its transfer agent. More importantly, certificates (if any) are issued only to the direct owners of securities, and today a donor rarely owns publicly-traded securities directly. The typical donor’s interest is instead evidenced by entries on the books of a “securities intermediary,” typically a broker, with which the donor has an account. U.C.C. § 8-102(a)(14). Because the donor does not possess the presupposed certificates, the above-referenced guidance is largely irrelevant to the question posed.

Applicable Local Law

The question must consequently be analyzed under more general giftand-estate-tax rules. As always, proper application of those rules requires an understanding of applicable local law. See, e.g., Morgan v. Comm’r, 309 U.S. 78, 80–81 (1940). Sources of law potentially applicable include both the accountholder’s agreement with the securities intermediary and the applicable version of the Uniform Commercial Code (U.C.C.) Article 8, Part 5, that has been adopted by every state, dealing with “how interests in securities are evidenced and . . . transferred” under the above-described “indirect holding system.” U.C.C. art. 8 prefatory note pt. III.B.

With that background, it may be helpful to ask: Of what legal significance is the usual debit from the donor’s securities account? Can the donor complete an intended gift before the debit occurs—for example, by an irrevocable directive given to the securities intermediary, or by a written assignment delivered (only) to the intended donee?

The Supreme Court of South Carolina faced a related question in In re Estate of Rider, 756 S.E.2d 136 (S.C. 2014). A review of that case informs the current analysis. “The decedent had directed his bank to transfer specified assets in his investment account to a new account for his spouse but died before all of the assets were credited to her account.” Id. at 137. The question was whether the assets credited only after the decedent’s death remained part of the decedent’s probate estate (in which case they would benefit his descendants from a prior marriage). A subsidiary question was whether the U.C.C. or, instead, the South Carolina common law of agency controlled the outcome: Under the latter, the bank’s authority to credit the assets would have terminated on the date of the decedent’s death (the bank having been notified on that day). The court concluded that the U.C.C. relevantly supplanted the common law, citing legislative history and commentary indicating that the U.C.C. was intended “to provide a uniform method of resolving issues in order to promote liquidity and finality, to be supplemented by (not thwarted by) the rules of agency and other applicable laws.” Id. at 143. The court further held that pursuant to the applicable U.C.C. provisions, the decedent’s directive was effective when made; it “[did] not become ineffective by reason of any later change in circumstances,” including the decedent’s death, id. at 141 (quoting S.C. Code Ann. § 36-8-107(e)); and the bank was consequently obligated to “obey his directive.” Id. at 143. In support of its holding, the court observed that under the U.C.C., a person generally acquires a “security entitlement” if the “securities intermediary does any of the following three things”:

(1) indicates by book entry that a financial asset has been credited to the person’s securities account;

(2) receives a financial asset from the person or acquires a financial asset for the person and, in either case, accepts it for credit to the person’s securities account; or

(3) becomes obligated under other law, regulation, or rule to credit a financial asset to the person’s securities account.

Id. (quoting S.C. Code Ann. § 36-8501(b)). The court had already held that the bank became “obligated” to credit the spouse’s account, within the meaning of paragraph (3), when the decedent issued his directive. The court consequently held that the assets credited to the spouse’s account only after the decedent’s death belonged to the spouse and were not part of the decedent’s probate estate.

“Irrevocable” Directive to Securities Intermediary

Of what relevance is In re Estate of Rider to the tax question posed? By holding that a gift directive to a securities intermediary determines the rights of donor and donee, even if it is not effectuated by the securities intermediary until after the donor’s death, the court indicated that the debit from the donor’s account is not crucial. The court expressly did not reach the question, however, whether the decedent’s directive completed a gift (under local law) at the time it was made. Id. at 142, n.3. In that regard, a seemingly important gift-and-estate-tax question is whether the directive was, or could have been made, irrevocable at the time it was made.

Following In re Estate of Rider, a donor attempting to complete a taxable gift before it can be reflected on the securities intermediary’s books may, as part of that effort, want to send the intermediary a directive to that effect, labeled “irrevocable,” even if the directive will not be immediately processed. An argument can be made that the gift is complete when the directive is sent. See U.C.C. §§ 8-102(a) (8), 8-507(a). Even if that argument is not persuasive, the directive is additional evidence of donative intent, which can only help. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers § 6.2 cmt. yy (2003).

Assignment

Suppose that instead of directing his bank to transfer assets to his spouse’s account, the decedent in In re Estate of Rider had purported to give those assets to his spouse via a written assignment delivered to her, but not the bank, during his life. Could that alone have completed a taxable gift?

A threshold question is whether such an assignment can ever give the assignee property rights, in the context of the above-described “indirect holding system.” See 5 Boris I. Bittker & Lawrence Lokken, Federal Taxation of Income, Estates and Gifts ¶ 122.2 (2d ed. 1993) (“If an intended donor manifests an intention to make a gift but fails under local law to achieve the intended result, no ‘transfer of property’ occurs, and a taxable gift has not been made.”). Based on what little guidance there is, the consensus appears to be that it can. See U.C.C. § 8-501 cmt. 5 (last two sentences); id. § 8-510 cmt. 3 (contemplating assignment); accord Jeanne L. Schroeder, Is Article 8 Finally Ready This Time? The Radical Reform of Secured Lending on Wall Street, 1994 Colum. Bus. L. Rev. 291, 425 n.321. The question potentially implicates the U.C.C., the agreement between the accountholder and the securities intermediary, and the applicable laws of gifts. Each is discussed briefly below.

The U.C.C. appears not to be directly relevant because, although it applies to the relationship between accountholder and securities intermediary, it does not apply to the relationship between wouldbe assignor and assignee. See U.C.C. art. 8 prefatory note pt. III.B; accord 7 William D. Hawkland et al., Uniform Commercial Code Series § 8-104:2 (through June 2022 update) (whether an “indirect holder of a security” has taken action “sufficient to effect a completed gift” is a question “not directly controlled by Article 8, but by the general law of gifts”). It has been suggested, however, that because under the U.C.C. an assignment does not, by itself, empower the assignee to direct the securities intermediary with respect to the subject assets, see U.C.C. § 8-507 cmt. 3, the assignment cannot, by itself, complete a gift under applicable local law. Egon Guttman, Modern Securities Transfers § 6:16 (4th ed. through 2021 update). It seems to this author that that suggestion raises the questions, under non-U.C.C. law, what rights the assignment gives the assignee against the assignor (and perhaps the securities intermediary, but see U.C.C. § 8-501(b)(3) cmt. 2) and whether those are sufficient to complete a gift. Those rights might include, for example, the right to require that the assignor direct the securities intermediary to reflect the assignment on its books, cf. Restatement (Third) of Prop.: Wills & Other Donative Transfers § 6.2 cmt. h, and an adequate claim against any assignor who first sells the assets out from under the assignee (to a bona fide purchaser for value and without notice, see U.C.C. § 8-502), cf. Restatement (Second) of Prop.: Donative Transfers § 34.9 & cmt. b (1992). In any event, the U.C.C. may be at least indirectly relevant, to the extent it is part of the background against which is made any factual determination about whether there was donative intent and “delivery” sufficient to complete the gift. Hawkland, supra.

Suppose the agreement between accountholder and securities intermediary prohibits assignment of the accountholder’s interest. Does that alone prevent the envisioned assignment? Perhaps not. Any such clause might be interpreted narrowly on the theory that it is intended to protect the securities intermediary, and not to restrain the accountholder. See generally Howard O. Hunter, Modern Law of Contracts § 21:17 (2022 ed.).

If neither the U.C.C. nor the account agreement bars assignment, as between the would-be assignor and assignee, is assignment possible under the contemporary law of gifts? That law appears broadly approving of gift by written assignment or other “donative document,” if signed and delivered. Restatement (Third) of Prop.: Wills and Other Donative Transfers § 6.2(2) & cmts. p–u. And to the extent, if any, the contemporary law of contracts applies, but see U.C.C. § 8-503, that law likewise “favors a liberal assignment policy.” Hunter, supra, § 21:8.

Declaration of Trust

So it may be possible to complete the envisioned gift by assignment. The preceding discussion, however, raises questions that do not have crystal clear answers. As relevant here, those questions relate to one overarching question: whether, in the context of the abovedescribed “indirect” system for holding securities, the envisioned assignment involves “delivery” sufficient to complete a gift under applicable local law. The same question is raised by the “irrevocable”-directive method, discussed further above.

That “delivery” question can at least largely be side-stepped by the use of a third method: a declaration of trust. No delivery is needed for a donor to declare that property, which is already the donor’s, is now held by the donor as trustee for the benefit of an intended donee. E.g., Restatement (Third) of Trusts § 10 cmt. e (2003); Guttman, supra; see also Treas. Reg. § 25.2511-2(g). For that reason, a declaration of trust is at least generally the surest of the three methods discussed in this article.

If the intention is both to complete a taxable gift and also to exclude the trust property from the donor’s putative gross estate, the terms of any such trust should (of course) be consistent with those goals—for example, the trust should expressly be made irrevocable, and the donor-trustee’s distribution authority should be sufficiently constrained. See, e.g., Treas. Reg. § 25.2511-2(g); Old Colony Trust Co. v. United States, 423 F.2d 601 (1st Cir. 1970); Rev. Rul. 73-143. It is also advisable—although not strictly necessary—to notify the trust beneficiary (or beneficiaries) of the trust’s existence, and to memorialize that notice, in order to reinforce the existence of the trust relationship. E.g., Restatement (Third) of Trusts § 14 & cmt. c.

Conclusion

A donor aiming to complete a taxable gift of securities from a brokerage account, before the gift can be reflected on the broker’s books, should consider making a signed, written declaration that the donor holds those securities in trust for the benefit of the intended donee (on otherwise appropriate terms), immediately followed by a directive to the broker, labeled “irrevocable,” that it update its books accordingly.

Regardless of which methods are employed as part of an attempt to complete the gift, the subject assets should be identified specifically—for example, by reference to specific securities or, perhaps, a percentage interest in the brokerage account as a whole. If there is insufficient specificity, there may, for that reason, be no gift or trust. See, e.g., Restatement (Third) of Prop.: Wills & Other Donative Transfers § 6.2 cmt. t; Restatement (Third) of Trusts § 40 cmt. e. In particular, the donor should avoid specifying only a target dollar amount because that tends to suggest something other than a presently effective gift or trust (unless perhaps the intended subject assets are cash equivalents then in the account and the amount specified does not exceed their aggregate value). Cf. Estate of Cummins v. Comm’r, 66 T.C.M. (CCH) 1232 (1993).

Published in Probate & Property, Volume 37, No 1 © 2023 by the American Bar Association. Reproduced with permission. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or stored in an electronic database or retrieval system without the express written consent of the American Bar Association.