Understanding Joint Ownership And Estate Tax: Deep Dive Into The Rules

Joint ownership with right of survivorship is a convenient way to pass assets without a will. If ... More not carefully planned, it raises very significant estate tax issues and difficult estate administration. When one spouse in not a U.S. citizen, complexities multiply.
When it comes to estate planning, how you hold property with others can have significant tax implications after you have passed on. Internal Revenue Code Section 2040 governs how joint ownership of property with right of survivorship is treated for federal estate tax purposes. The rules can catch even the most astute investors off guard. Whether it’s a stock portfolio shared between siblings or a family home owned with a spouse, the tax outcome hinges on various factors including who paid what for the asset, whether in the case of spouses both are U.S. citizens and whether there are well-maintained records tracing contributions.
This article will look at a real-world example involving property owned as joint tenants with right of survivorship. Joint ownership without the right of survivorship (for example, tenancy in common) is not the same as JTWROS and is governed by different rules. Other issues will also be explored, such as special provisions for married couples, including the nuanced case when both spouses are not U.S. citizens.
Joint Tenancy With Right Of Survivorship
JTWROS is a common ownership arrangement where, upon one owner’s death, the property passes automatically to the surviving joint tenant(s). Property owned in JTWROS avoids probate, which is the legal process of transferring a deceased person’s property to their designated beneficiaries. When one owner in a JTWROS passes away, that property does not go through probate and the JTWROS controls. What this means for example, is that provisions in a Will do not affect the survivor’s absolute right to the joint tenancy property.
Joint Ownership: The Case of Two Sisters and a Stock Portfolio
Imagine two sisters, A and B, who own a stock portfolio as joint tenants with right of survivorship. Sister A funded the entire portfolio with her own money, contributing 100% of the purchase price, while Sister B did not contribute at all. This was intended for estate planning purposes. Sister B passes away first when the portfolio is valued at $1 million. What happens to the portfolio for U.S. estate tax purposes?