Gruen v. Gruen: A Lesson on Gift Delivery

Painting Gift Tax Expensive

Expensive Gift

When we think of gift giving we tend to conjure a predictable set of ideas and images: we think of Christmas, birthdays, graduation ceremonies and other occasions in which gifts are exchanged. Seldom do we think of legal ramifications which may be triggered by the delivery of a gift. But when a gift is of exceptionally high monetary value, the act of gift giving can sometimes become a bit more complicated than normal. Gruen v. Gruen (1986) is an interesting case which involved the transfer of an extremely valuable piece of art from a father to his son; the ruling of the case clarified some of the uncertainty on the question of what constitutes proper or “valid” delivery of a gift. If you or someone you know is thinking about giving a gift of similar value, Gruen v. Gruen may be essential reading!

Facts

The father, Victor Gruen, attempted to make a gift of an oil painting by Gustav Klimt to his son, Michael Gruen, in 1963. The father wrote his son a letter in which he explained that, although he wished to transfer title of the gift, he wanted to retain physical possession of the painting for the duration of his life (in other words, retain a life estate in the painting). After being advised against this by his lawyer and accountant, the father wrote another letter to his son regarding the gift and omitted reference to his continued physical possession of the painting. The issue of the case is whether a valid transfer of title of the painting occurred given the fact that the son never took physical possession of the painting while his father was alive.

Ruling

The court (the Supreme Court of New York, upholding the decision of the appellate court) ruled in favor of the son. The son was attempting to establish ownership of the painting against another relative (Michael Gruen’s stepmother). The court found that the father had made a valid transfer of ownership despite the fact that he retained a lifetime interest in the painting. If someone wishes to transfer ownership of property specifically after their death, a will is required; the court reasoned that in this case present transfer of ownership occurred because there was a clear donative intent to bestow ownership upon the son.

Lessons

At the time the case was being tried, the painting by Klimt was worth approximately 2.5 million dollars – quite a birthday gift! The father was afraid that his son would have had to pay inheritance taxes on the gift if he (the father) continued to hold possession of it for the remainder of his life. As it turns out, his fear was without basis: Gruen v. Gruen shows that it is possible to make an inter vivos gift even without physical delivery of the property. As long as there is donative intent, physical or constructive delivery, and acceptance by the receiving party, a valid gift has been made.

Image credit: Bill Damon

The next time you plan to make a gift of an expensive item, don’t be worried about gift tax laws and instead be thankful your situation isn’t nearly as tricky as the one faced by the Gruen family!

Be Sociable, Share!

johnAbout john
Seattle CPA+John Huddleston has written extensively on tax related subjects of interest to small business owners. He is a graduate of Washington State University and the University of Washington School of Law.

Huddleston Tax CPAs of Seattle & Bellevue
Certified Public Accountants Focused on Small Business

(800) 376-1785
40 Lake Bellevue Suite 100, Bellevue, WA 98005

Huddleston Tax CPAs & accountants provide tax preparation, tax planning, business coaching, Quickbooks consulting, bookkeeping, payroll and business valuation services for small business. We serve Seattle, Bellevue, Redmond, Tacoma, Everett, Kent, Kirkland, Bothell, Lynnwood, Mill Creek, Shoreline, Kenmore, Lake Forest Park, Mountlake Terrace, Renton, Tukwila, Federal Way, Burien, Seatac, Mercer Island, West Seattle, Auburn, Snohomish and Mukilteo. We have a few meeting locations. Call to meet John Huddleston, J.D., LL.M., CPA, Tawni Berg, CPA, Jennifer Zhou, CPA, Jessica Chisholm, CPA or Chuck McClure, CPA. Member WSCPA.