Joint Tenancy Property and Non-Probate Wealth Transfers. Downton Abbey Examples (applying US law)

Share This Article

Focus on Tax Issues

The term tenancy invokes the occupation of property. Indeed, the most well-known type of joint tenancy is that of real property, but joint tenancy can apply to any type of property. Fundamentally, joint tenancy is a form of co-ownership where two or more people own property in equal undivided interests. This is in contrast, the more common form of co-ownership is known as “tenancy in common”.

Back to joint tenancy. Assume Lord and Lady Grantham own Downton Abbey as joint tenants, that does not mean that Lady Grantham (formerly Levinson) owns the West Wing and Lord Grantham (Robert Crawley) the East Wing or some other such arrangement, instead both own half (an equal part) but in an undivided form. Even more important is that Lord and Lady Grantham have the mutual right of survivorship. If Lord Grantham dies first, Lady Grantham automatically, by operation of law, gets Lord Grantham’s share or interest, no will or probate proceedings needed.

Now this sounds like a pretty nice way of avoiding probate, and sometimes it can be. However, there are a lot of strings attached to joint tenancy. Let’s examine them.

Gift Tax on Creation of a Joint Tenancy

A gift tax may apply to the creation of a join tenancy. The IRS defines as gift “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return”. Assume that Lady Grantham (the rich American heiress) buys a stately summer residence in Cornwall and creates a joint tenancy with her daughter Mary Crawley who paid nothing. When this transfer of wealth into the joint tenancy cannot be reversed, as is the case with real estate transactions, a gift will have been made in the transfer and this counts against the annual and lifetime gift tax exclusion.

Now assume that Lady Grantham bough the same house but instead she created a joint tenancy not with her daughter but with her husband, Lord Grantham. Here a gift would still have been made but without gift tax consequences, because of the unlimited marital deduction for the transfer to a spouse (IRC 2523(a)).

In still another variation, Lady Grantham establishes and funds a money market account on the Isle of Man in the name of herself and her daughter Mary Crowley as joint tenants with the right of survivorship. In this case, no gift has been completed because Lady Grantham could withdraw some or all of the funds at any time prior to her death. A gift does occur, however, when Mary receives funds from the joint account.

Gift Tax on Termination of a Joint Tenancy

The gift tax results, upon termination of a joint tenancy in real estate, depend upon whether there was a taxable gift upon acquisition. Let’s assume the unthinkable, Lady Grantham and Lord Grantham get a divorce. In this case Lord Grantham will likely wish to sever (i.e., terminate) the joint tenancy to disestablish the right of survivorship. As Lords typically die earlier than Ladies, the former Lady Grantham would get all of the Cornwall house upon Lord Grantham’s passing if no action is being taken. Let’s say that Lady Grantham feels charitable and agrees to a transfer of one-half of the title to him and one half to her.

If the gift of the one-half interest was taxable upon acquisition, that one-half is not again taxable upon termination. If the gift was not taxable upon acquisition, transfer of a one-half interest upon termination will constitute a taxable gift. As we have heard earlier, the couple, when still blissfully married, took advantage of the marital deduction and was able to avoid paying gift tax upon creation of the joint tenancy, but now they will have to pay.

Estate Tax for Joint Tenants

Death is a taxable event. Most estates are far below the very generous estate tax exemption of 11.7 million in 2021 and 12.06 million for 2022. Let us come back to the Cornwall house, here we assume that it is owned in joint tenancy by Lord and Lady Grantham. Lord Grantham has recently passed. In this case, i.e., a spousal joint tenancy, only half of the interest will be included in Lord Grantham’s gross estate. Because the qualified joint interest passes to the surviving spouse, no estate tax is paid on that interest under the unlimited marital deduction.

Otherwise, i.e., when the joint tenants are not spouses, the treatment is different. Under a different hypothetical, Lady Grantham bought a summer house in Cornwall and put it into her name and her daughter Mary’s name  (Mary contributed nothing) as joint tenants with right of survivorship.  Upon Lady Grantham’s death, the entire property is included in her estate. Why? Because if this was not the case, estate taxes could easily be avoided by this type of arrangement. However, the IRS is not unreasonable and allows the decedent’s estate to show, if they can, that their portion of the property originally belonged to the survivor and was a gift, or as the IRS more poetically puts it, was never received or acquired by them from the decedent “for less than adequate in full consideration in money or money’s worth” 26 U.S. Code § 2040 – Joint interests.

This rule would under the facts given not apply to Lady Grantham if she were to predecease her daughter, as would be likely. However, if Mary, her daughter was to predecease Lady Grantham, the personal representative of Mary’s estate could show that the house was bought with Lady Grantham’s funds and was therefore a gift to the decedent and should not be included in Mary’s estate.

Downton Abbey is fictional, so are these scenarios. None of what is posted on this site constitutes legal advice. Engage a trust and estate’s lawyer and/or a CPA for your legal and tax matters.

We don’t spam! No more than five mailings per year.

More Articles

Schedule a free consultation with Klaus Gottlieb

© 2024 wealthcarelawyer.com. All rights reserved.

Wealth care is an orchestrated approach to your estate planning needs that considers multiple dimensions and coordination with your existing financial and tax professionals.