Joint Tenancy Property

[MisterPete]

For Pennsylvania and Federal Tax Laws:

What are the pros and cons of Joint Tenancy with regards to estate planning?
For two Joint tenant owners (not husband and wife) of property (stocks or real estate), how does the surviving owner acquire the property after the death of the other owner? More specifically, does this property need to go through probate? Are there estate taxes involved and how are the estate taxes assessed? I read somewhere that Joint Tenancy is similar to a contract and that it does not need to undergo probate, is this accurate? Do taxes need to be paid? If so, is the transfer of property treated like inheritance or a gift? Is only 50% of the joint property taxed?

Thank you.

[abezon]

JTROS does not go through probate. However, the value of JTROS property is included when determining if the decedent owes any estate death taxes. If the owners were married, only 1/2 of the FMV of the property is inlcuded in the decedent's estate. Otherwise, the full value is included.

The surviving owner gets a full step up in basis (to FMV) if the owners were not married or were married in a community property state. In a separate property state like Pennsylvania, a surviving spouse gets a 1/2 step up & keeps his/her 1/2 of the original basis.

CONS:
Either owner can force a sale through the courts.
Creditors of 1 owner can go after the assets even if the other owner doesn't want to sell.
Who controls if the owners don't agree?
May trigger taxable gains for some owners upons sale if it's a promary residence.
Defeats claims of separate property.
May trigger gift tax requirements if the new owner doesn't give adequate payment for his/her share.
May trigger estate taxes, if the decedent's estate was large & the full value of the JTROS asset is included (instead of half).
Cannot have unequal ownership.

[seniorjudge]

Good answers from abezon.

Q: For two Joint tenant owners (not husband and wife) of property (stocks or real estate), how does the surviving owner acquire the property after the death of the other owner?

A: Generally, a death certificate is needed to show whoever that the other person has died. For example, if you and I own a piece of real estate at JTWROS, and I die, you would have to record my death certificate in the land deed records.

[anteater]

abezon -

Just a clarification/question. For federal estate tax purposes and for non-spouse joint owners, the presumption is that the total value of the jointly owned assets is included in the decedent's estate. But, if the surviving owner(s) demonstrate that they obtained their ownership interests by providing fair consideration, then only the value of the deceased's proportionate ownership share would be included. Right?

Pennsylvania inheritance tax appoaches this differently. It does not inquire as to how the joint owners obtained their shares (even if it is by gift, as long as the owner making the gift survives for a year after making the gift.) From Schedule F:

Disclose the full value of all assets on this schedule and show the decedent’s
taxable interest at death. Determine the decedent’s taxable
interest by dividing the full value of the property by the number
of joint tenants.

Since most folks are not subject to the federal estate tax, but almost all estates in PA are subject to the PA inheritance tax (and the rates are pretty steep except for spouses and lineal descedants), it makes for an interesting calculus.

[abezon]

Originally Posted by anteater

abezon -

Just a clarification/question. For federal estate tax purposes and for non-spouse joint owners, the presumption is that the total value of the jointly owned assets is included in the decedent's estate. But, if the surviving owner(s) demonstrate that they obtained their ownership interests by providing fair consideration, then only the value of the deceased's proportionate ownership share would be included. Right?

Correct. Since most people don't have a taxable estate, proving proportionate ownership interests is actually detrimental to the surviving owner, since then s/he only gets a partial step up in basis. However, if I had a decedent with a taxable estate and an executor with adequate records, I'd sure try to exclude some of the joint asset.