ROBERT L. SOMMERS
Note: This exercise is for educational purposes only and is not intended to be legal or tax advice. Your particular facts and circumstances must be considered when applying the U.S. tax law. You should always consult with a competent tax professional with respect to your particular situation.
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Generally, yes. According to the IRS, you have made a gift of 50% of your property and a gift tax return is required. The IRS believes that a gift can happen without the intent to make a gift ("donative intent"). The courts have ruled, however, that if you lacked donative intent, but rather created the joint tenancy to expedite transfer of property upon death or to avoid probate, a "nominal joint ownership" was created and no gift actually occurred. Typically, the court will look at the actual facts of each case -- not just the form of the transaction -- to determine whether there was the intent to make an immediate gift. Note: Creating a joint tenancy with your spouse does not have gift tax consequences.
No, placing a bank account or stock account in joint tenancy does not constitute a gift since you may still withdraw all your money at any time. A gift will occur when the co-tenant actually withdraws any of your money.
Besides gift taxes, your property could also be subject to estate taxes. Your estate includes the full amount of jointly held property, except to the extent the surviving tenant can prove he made valuable contributions (furnished valuable consideration) to the property. If your daughter furnished none of the consideration nor provided any value to your residence, the entire value of your residence will be part of your estate and subject to estate taxes. Your estate will receive a credit for any gift taxes paid earlier. The same result occurs with your bank or brokerage accounts. Note: If the surviving joint tenant was the decedent's spouse, then 50% of the property becomes part of the decedent's estate, since a husband and wife are considered to own the property equally.
If your estate is under $600,000, the full inclusion of your jointly held property could be a blessing. Generally, estate taxes are not owed on taxable estates worth $600,000 or less. Usually, your assets receive a "stepped-up" basis to fair market value ("FMV") at the date of your death (or, in some cases, the FMV 180 days after death). The surviving tenant receives a FMV basis in your residence and bank or brokerage accounts; therefore, any capital gain inherent in those assets is eliminated. Conversely, if your taxable estate is worth more than $600,000, then full inclusion of the jointly held property will produce an immediate estate tax.
For example: If you created a joint tenancy with your residence which you bought for $50,000 for your residence and is worth $200,000 at the time of your death, the capital gain would be $150,000. However, under the stepped-up basis rules, the surviving tenant receives a FMV basis of $200,000. A later sale of the residence of $225,000 will produce only a $25,000 taxable capital gain, rather than a $175,000 gain.
If your daughter furnished 25% of the consideration for the residence, then only $150,000 would be part of your estate and your daughter would receive a basis step-up of $150,000 on your 75% share. Assuming her basis in her 25% was $12,500 (25% of the $50,000 cost basis), her new basis would be $162,500 ($150,000 + $12,500). A sale for $225,000 would produce a taxable capital gain of $62,500.
Unfortunately, the basis would be stepped down to FMV. If the decedent owned stock with a basis of $50/share which was worth $10/share at the time of his death, your new stock basis will also be $10/share. If possible, the decedent should sell the stock and recognize the loss, prior to death. In conclusion, to take full advantage of the stepped-up basis rules, appreciated property should be held, but property with a basis greater than its FMV should be sold prior to death.
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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**