Brown & Associates - Attorneys & Counselors at Law, P.L.L.C.

The Next to Final Word on Joint Tenancy
(01/07/01)

Recently, I've been focusing on the benefits and problems of joint tenancy and the effect this form of ownership will have on the passing of property at your death. Today I'm going to be looking at some of the common questions I hear from my clients.

"What happens if I establish a joint tenancy with someone other than my spouse?"

If you place property in a joint tenancy with some one other than your husband or wife, you will have to pay a federal gift tax. For example, if you acquire property in your name only and then decide to give a ½-interest in it to someone other than your spouse, you will be making a "gift" to that person of one-half the value of the property.

Let's assume the property is worth less than $20,000. In this situation, it really isn't a problem. The one-half interest you are gifting is worth $10,000 or less, so you won't have to file Form 709 (the federal gift tax return) or pay federal gift tax.

If, on the other hand, the value of property is greater than $20,000, the one-half interest you are giving away is worth more than $10,000 and you will have to both file a gift tax return and use up part of your $675,000 exemption (for 2000). If you have already used your entire exemption through other gifts, you will pay taxes on the portion of the gift that exceeds $10,000.

As with everything else involving the IRS, there are exceptions to the rule. There are two exemptions: one applies to joint bank accounts and the other to U.S. savings bonds. The IRS says if you convert a separate bank account to a joint bank account or give someone U.S. savings bonds, you really haven't made a gift--not, at least, at that time.

The actual gifting, for tax purposes, doesn't occur until the new joint owner withdraws money from the bank account or the recipient of the savings bonds cashes them in. Once these actions occur, you have made a gift--and if the total value of all gifts to that person in that year exceeds $10,000, you must report it on Form 709.

"If my wife and I buy property in joint tenancy, will it be taxed when I die?"

So long as you buy property with your wife (or husband), your estate will not owe federal or Oklahoma estate tax if you are the first to die. This is because of the unlimited marital deduction which says anything you leave to your spouse is exempt from tax at your death.

When your wife dies, assuming she survived you, this jointly owned property may well be subject to Oklahoma or Federal estate tax.

There are three ways for your wife's estate to avoid tax at her death: (1) your wife can bequeath the property to her new (second) spouse and qualify it for the unlimited marital deduction; (2) she can bequeath the property to a qualified charity; or (3) if the value of your wife's taxable estate is small enough at the time of her death. For 2000, estates valued at $475,000 or less were exempt from Oklahoma estate tax and those valued at $675,000 or less were exempt from Federal estate tax, as well.

Unless she qualifies for one of these exceptions, the property you owned jointly will be taxed at your wife's death.

If your surviving spouse's estate exceeds the exempt amount ($675,000 for 2000, increasing to $1,000,000 in 2006--and possibly higher if one believes our politicians), she should consult with an estate planning professional.

Remember, this benefit is only available if you own property jointly with your spouse.

If you own joint tenancy property with anyone other than your spouse, especially if you bought the property and then die first, the full value of the property will be included in your estate.

This doesn't mean the joint owner won't get the property, it just means the property will be taxed as though you still owned it. If your estate isn't able to pay the taxes due on the property at your death, the IRS and/or OTC will have an enforceable tax lien against the property.

"What if I pay for the property and my joint owner dies first?"

If the joint owner (who didn't contribute to the purchase of the property) dies first, the property is not included in his or her estate. Instead, the entire value of the property remains in your estate and is subject to tax at your death. Your hope of avoiding estate tax just died, too.

"What happens if the property was inherited?"

If you acquire jointly owned property by gift or inheritance, one-half of the value of the property will be included in the estate of the first joint tenant to die. Then, when the second joint tenant dies owning the property in its entirety, it's full value will be included in his or her estate, as well. This is the worst possible scenario.

If you are in this situation or have any other questions about joint tenancy ownership, be sure to speak with a qualified estate planner who can advise you of your options. Next week I'll talk about some other potential problems involved in joint ownership of property.

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