Taxation of Estates and Gifts

Joint Interest

Generally, gross estates include the fair market value of property to the extent of the interest held. Thus, if two people own property as tenants in common, each's share will be included according to the percentage ownership, regardless of what each actually paid.

For jointly-purchased, non-spousal joint tenants with rights of survivorship, even though they always own equal shares, the percentage paid for by the other party for full and accurate consideration will be excluded. 26 U.S.C. § 2040(a).

• $\mathrm{Inclusion\; Amount}=\mathrm{value}\times (1-\frac{\mathrm{others\text{'}\; contributions}}{\mathrm{total\; cost\; of\; acquisition}})$
• Capital in the initial purpose and in later improvements are counted together.
• If a mortgage was used to pay for the property, it also includes any mortgage payments paid and half of any outstanding mortgage at the time of death.
  • If a second mortgage is taken and partially used to pay off the first mortgage, the portion of the second mortgage used to pay off the first is includable the same way. (If $100,000 is taken out, $60k of it is used to pay off the first mortgage, the surviving partner pays off $10k, and then the other partner dies, $33k will be includable. [($60k / $100k) × ($10k + ($90k / 2)) = $33,000])

If only owned by a husband and wife, the value is is always split 50/50. 26 U.S.C. § 2040(b).

• Especially if planning for a non-portability regime, you do not want this with valuable because you cannot necessarily apportion it well. A better type of property ownership would be better.
  • Although, the applicable exclusion amount would probably go down too if non-portability returned, so you might want to get it over with with the higher amount.

When a joint interest is gifted to a spouse, that half of the giftor's basis is transferred along with the property. 26 U.S.C. § 1041(b)(2). When the giftor then dies, a surviving joint tenant with right of survivorship will take a fair market value basis in the decedent's estate. 26 U.S.C. § 1014(a)(1).

• E.g., so if wife buys property for $10, she puts it in joint interest with husband, the value goes up to $20, and she dies, the husband's basis will be $25. $10 will be included in the gross estate.
• It does not matter if spouses paid different amounts for property if their interests are equal.
• If community property, the whole fair market value is the basis.

The basis of gifts is the basis that the giftor had. 26 U.S.C. § 1015. So if a parent buys property worth $10 and gives half to a child, both will get a basis of $5. The child's basis would also be increased by the parent's half's fair market value if the parent dies.

If two joint tenants who are not married die at the same time, the property is treated half as if the decedent survived and half as if he did not. (Usually, this will mean half is included as a joint interest under 26 U.S.C. § 2040 (Although this will be $0 if the decedent did not pay anything.) and half is included under 26 U.S.C. § 2033.)