CHAPTER 12 – JOINTLY OWNED PROPERTY

Types of jointly owned property (real property and personal property):

1)   Tenancy in common (TIC)

·         Joint tenancy with the right of survivorship (JTWROS)

·         Community property (CP)

4)   Tenancy by the entirety (between spouses)

JTWROS Property – Estate Planning Objectives

1)       Simple method for shifting property ownership at death; 

2)       Beyond probate court jurisdiction.

Query:  How under local law create JTWROS property ownership status?

                     See Texas Probate Code, §46(a) (p.2),  and special Texas Probate Code provisions (§439(a)) re survivorship bank deposits.

JTWROS  possible with community property?  Yes, see Probate Code §451

Spousal & Creditors’ Rights & JTWROS Interest

Assume:  JTWROS between the decedent and a person other than the spouse. 

Does the decedent’s surviving spouse have rights to some/all of the JTWROS property?

Under UPC the surviving spouse has rights, i.e., the property is part of the “augmented estate.”

Creditors rights:  see Texas Probate Code §442 re rights of creditors – estate obligations and secured creditors can collect against JTWROS accounts of the decedent.

Gift Tax on Creation of JTWROS Interests        p.5

Non-spousal situations – When is the gift completed if property is transferred into JTWROS status?  When transferred? Upon later severance of the JTWROS interest?

What if both parties must agree to terminate the JTWROS status?  E.g., “tenancy by entirety.”

See Rev. Rul. 78-362 (p.5) concerning co-tenant’s monthly payments on JTWROS property with mortgage debt amortization. 

Gift Tax on Creation of JTWROS Interests, cont.

Spousal situations, where spouse is made a joint tenant in property held by other spouse.  P. 7

Will a marital deduction be available; or is this a nondeductible terminable interest?   See §2523(d) concerning creating joint interests as completed spousal gifts and not precluding the marital transfer because property might be returned to first spouse.

Estate Tax upon Joint Tenant’s Death           p.7

Code §2040 requires complete inclusion of JTWROS property in the gross estate of joint tenant – except for such portion as is contributed by the other joint tenant.

Cf., §2040(b) rule concerning ½ inclusion (and ½ exclusion) when spouses are the joint tenants.  

Avoid the applicability of this rule (e.g., when a basis step-up rule is applicable)?  Possible excess marital deduction gift (or included in the MD formula provision)?

What is “Consideration” Paid for JTWROS Property

Exclude the portion attributable to the contribution by the surviving joint tenant – but that portion can not be attributable to money (or other property) originally acquired from the decedent. 

Bernice Anderson case (p.8):  did the son contribute consideration?  What is the importance of “sweat equity”?  If earning a property interest through services then also an income tax issue to the son?

Further “Consideration” Issues                         p.17

Does consideration for this purpose (i.e., provided by decedent) include:

·         Property received by gift from the other joint tenant?

·         Ordinary income realized by the donee from the gift property?

·         After-tax sales proceeds of post-gift appreciation from the gift property used to acquire joint tenancy property with donor?

Rev. Rul. 79-372, p.17.

Community Property
p.19

What is the essential concept of “community property” (CP)? 

What is the concept of a “manager” of the community?  Which spouse can be manager?

What is the legal capacity of one spouse to transfer entire community at the time of death?

Note Rev. Rul. 67-383 (p.20) re (1) gross estate inclusion and (2) the (attempted) transfer by the decedent of the entire community property.

Community Property & Conflict of Laws Issues

1) Consider spouses moving (with property) from a common law property jurisdiction to a CP state.

2) Consider spouses moving from a CP state to a common law property state.

·         Other alternatives?  Move from one CP state to another CP state having differing CP ownership rules.

·         Note (p.22) Texas Family Code §3.63 re divorce – but what about rights at death?

                     Note the Uniform Act re CP rights at death.

CP and Income Tax Basis at Death                     p.23

Code §1014(b)(6) provides for basis step-up at death for the entire CP.  But, was not applicable in calendar year 2010 if electing out of estate tax.

Rev. Rul. 87-98, p. 24: CP with title held in JTWROS (a “common law estate”).  Intention to retain property in CP status and not transmuted into separate property.  Under §1014(b)(6) the tax basis of the entire property is stepped-up (or down). How retain CP status for this basis step-up purpose?

Rev. Rul. 92-37, p.25
Cost Depletion Deduction

CP interests held by H & W in mineral property.  A depletion allowance is determined separately for each spouse for tax purposes.

The surviving spouse’s cost basis is determined as stepped-up under §1014(b)(6) for cost depletion purposes (and depletion is calculated based on adjusted basis as of the end of surviving spouse’s taxable year).

Lifetime Gifts of CP and Retained Interest Status

Spouse gives separate property to other spouse.  Applicable local CP law says income from separate property is CP.

Does ½ of the income from the transferred property belong to the transferor spouse & then is this a §2036(a)(1) “retained life interest”?

See Rev. Rul. 81-221 (p.28), rejecting estate tax inclusion, based on Wyly case (correct)?

But, then a Texas Constitution provision (all income belongs to the donee spouse).

The Widow’s “Forced Election”                     p.30

What is the objective of the “forced” widow’s election?

What are the relevant non-tax factors in requiring this election by spouse?

How is this “election” to be accomplished?

Who should be the legal counsel for the widow when she is making (or not-making) this “forced widow’s election”?

Widow’s Election and the Survivor’s Estate Tax

1st spouse to die – inclusion in the gross estate for the CP ½ & a forced widow’s election.

2nd spouse to die – a §2043 offset to prevent full inclusion in the 2nd gross estate? 

Gradow case, p. 32, holding the widow transferred her entire interest (not merely remainder interest in her CP, excluding her life interest) in exchange for an income interest in his CP property.

Correct result in Gradow case (p.32)?

Widow’s Gift Tax Liability
p.34

Widow transfers her CP into trust and receives a life interest in his CP;  children receive the remainder interest in her CP.  Gift tax?

“Consideration offset” available under §2512?

Turman case (p.34):  Surviving spouse transfers CP interest, less the value of her retained life interest; also reduce by the value of the life interest in all CP into trust? Yes (no gift). But, presently §2702 (in some situations)?

 

Widow’s Income Tax Consequences           p.40

Widow transfers (1) remainder interest in CP in exchange for (2) a life interest in his CP.

1)       Sale or exchange?  But, §1014(b)(6).

2)       Amortization of the life interest she received?  See Gist, p. 40, permitting an amortization deduction.

But, note (subsequently) §167(e) re the disallowance of this income tax deduction.

Estate’s Income Tax Consequences         p.43

What is the income tax treatment to the decedent’s estate on the sale of the life interest in the decedent’s CP in exchange for receiving the spouse’s CP remainder interest  into the trust established under decedent’s will?

A basis step-up under Code §1014(b)(6) occurs;  but, total gain recognition is required since a zero tax basis is allocated to the life interest in this situation. Code §1001(e).

What Alternative Structures?              P.44

A voluntary widow’s election, rather than a “forced election”?

What order of income distributions from these trusts?  I.e.,  first deplete her trust (since inclusion of these trust assets in her gross estate, but not the trust from the husband’s estate)?