How your property is titled can affect how it is taxed and whether or not it receives a step-up in basis upon your death. Therefore, consider adding your spouse, child, friend, or business partner to the title of your property depending on your intentions with the property after your death. Read on to discover the planning opportunities to exclude these assets from your taxable estate and defer the estate tax to a later time.
Whether you are purchasing real estate or funding a brokerage account, the way the asset is titled may effect your estate and the related taxes. If you are considering buying or owning assets with another person, you may want to consider titling the asset as Joint Tenancy with Right of Survivorship.
Joint Tenancy with Right of Survivorship:
In computing federal estate tax the decedent’s gross estate includes all assets and liabilities held at the date of death unless there is an exception. One of these exceptions relates to jointly held property with right of survivorship. The essence of joint tenancy with the right of survivorship is at the time of death of the first owner, the entire title of the property transfers to the surviving owner. This is a tool often used to exclude assets from probate. Assets including real estate, bank accounts, vehicles, and investments can be titled this way. As long as certain qualifications are met, some or all of the value of this asset can be excluded from the gross taxable estate. In order to exclude any part of the jointly held asset from the estate, the executor must prove the surviving joint owner acquired their interest for adequate and full consideration or by bequest or gift from a third party. The percentage interest acquired by consideration from the surviving tenant is not subject to estate tax for the first decedent.
Therefore, merely being named as joint tenant on the property deed is insufficient to exclude the property from the estate of the decedent that did provide adequate and full consideration. Consideration does not include money or property that was acquired from the decedent by gift or bequest. Additional consideration is given if the owners were jointly and severally liable on a mortgage on the property that remains outstanding at the death of the decedent. In this case, the surviving joint tenant’s total contribution to the purchase of the property includes the following:
- Survivor’s actual payments for the purchase of the property
- Later mortgage payments
- One-half of the mortgage indebtedness that remains outstanding at death
Qualified Joint Interests:
A special rule applies to “qualified joint interests” (property owned solely between a husband and wife as “tenants by the entirety” or as joint tenants). Under this rule, the decedent’s gross estate includes 50% of the value of the qualified joint interest, no matter how much each spouse provided in consideration. Even still, as long as both the decedent and the surviving spouse are United States citizens, no estate tax liability will arise because of the availability of the marital deduction. This deduction is available for qualifying property transferred to a spouse upon death. At the death of the surviving joint tenant, the property will be fully includible in the survivor’s gross estate for estate tax purposes because the property is no longer considered joint and survivorship property.
Assets included in the gross estate for federal estate tax purposes achieve a step up in tax basis for federal income tax purposes. Because California is a community property state, the entire property will receive a step-up in tax basis even if only one half of the property was included in the estate of the first spouse to die. Thus, if the property is sold immediately following the first spouse’s death, there is no gain or income tax due on the sale on the tax return of the surviving spouse.
Joint tenancy can be applied to any type of asset, including real estate, bank accounts, vehicles, stocks, etc. Establishing this type of ownership can be tricky and is best accomplished by an experienced lawyer or agent to ensure that the phrasing in the deed accomplishes the end goal. If done correctly, owning large assets in a joint tenancy with right of survivorship can be an effective estate planning tool. If you have any questions or are interested in understanding how these rules may benefit your particular situation, please do not hesitate to contact us at (858) 558-9200.