How is jointly owned property valued for estate tax

[ej401]

Father and son owned condo as joint tenants with rights of survivorship. Father passed – does son inherit property at fair market value on father’s date of death? Is the condo included in father’s taxable estate?  (Father was a New Jersey resident but condo located in New York. Estate not more than the federal or NY exemptions, but is more than the NJ exemption.)
Thank you!

[mwcpa]

"does son inherit property at fair market value on father’s date of death?"

that depends.... can the son show any investment in the property?  if not then it was, for estate tax purposes, the father's property.  titling property does not necessarily "split" value for estate tax.

"Is the condo included in father’s taxable estate?"

Yes... in your facts the property is jointly owned by a father and son (who is other than the father's spouse). 100% of the value of the property is included in the father's estate if he furnished all of the funds for the purchase and improvements (not upkeep). The value is prorated to the extent each owner contributed to the cost of the acquisition of the jointly held property.

Example....

Property cost 100

Father put up the down payment and made all mortgage payments. 

This is 100% in Dad's estate

Example2....

Property cost 100

Father puts up 1/2 the down payment and son puts up the other 1/2.  Each split the mortgage payment 50/50.

This is 50% in Dad's estate.

The estate tax on "non-residents" is a little more complicated than looking at the value of any asset included in the non resident state.  Do your homework here.

[ej401]

Thank you MW.

Fist example applies.
"Property cost 100. Father put up the down payment and made all mortgage payments.
This is 100% in Dad's estate"

Was a taxable gift made to son? Son subsequently sells the property.  What is his cost basis?

[mwcpa]

Did father file a gift tax return?

[ej401]

Thanks MW,

Sorry, question incorrectly stated.  No, father did not file a gift tax return.

Question supposed to be - If father paid for everything, and son did not have any financial contribution/participation at all - does it mean that  a gift was made to the son because property was titled as JTWROS with son, and therefore a gift tax should have been paid?

But then on second thought, if 100% of the value is in father's estate, that would mean that there was no gift made to the son.  Therefore, son inherits property at FMV, which would be his cost basis in subsequent sale - right?

Thanks again. 

[truthbound]

Jul 5, 2014 21:32:26 GMT -5 mwcpa said:

Did father file a gift tax return?

The question is whether the son was listed as a joint tenant.

[mwcpa]

Dad purchased real estate and put the title in his name and Son's name as joint tenants.  The property is 100% included in Dad's gross estate because he furnished all of the consideration.

While a gift tax return probably should have been filed at the time the asset was titled in Son's name, the entire value of the property is still included in Dad's estate based on the facts noted.

A nice way to have the asset transfer to son, but it ends up being a disastrous tax plan.  Perfect example of the unintended consequences of a really complex tax law.  I sure hope that Dad did not do this under the advice of counsel... that could be disastrous for the counsel.

When you gift assets of any material value (above the annual exclusion) or only gift part interests you really need to seek the advice of a qualified trust and estate attorney and tax advisor.

here are some articles on the topic

www.journalofaccountancy.com/Issues/2009/Feb/CreatingJointOwnership.htm

www.journalofaccountancy.com/Issues/2009/Mar/JointOwnership2.htm

[ej401]

Thanks so much MW!

The articles are helpful, albeit very complex. I'm neither an accountant nor a tax preparer;  just trying to gather information to help a friend.

My apologies - I thought it was much simpler to present the questions on a condo.
Property bought in 1997 by father was actually shares of stock (allocated to an apartment) in a co-op apartment corporation. Co-op corporation rules require that only stockholders can live in the apartment, therefore son was added as joint owner (stockholder) on the stock certificate - only so that son can live in the apartment; not an estate planning strategy at all. At the time, it was cheaper to own an apartment rather than rent.

Neither joint owner could unilaterally sever his interest in the apartment (shares of stock). Real estate lawyer, experienced in co-op transactions, was aware of this; he made no mention of gift tax due or any gift tax reporting. Apartment was paid in full and cost was only 25% of the 600K lifetime gift tax exemption in 1997.

Penalty for not filing Form 709? Was a gift tax due? 100% of value is in father's estate; still a very small estate but more than the NJ exemption of 675K and less than the NY exemption and federal exemptions. 

Does son inherit at FMV on father's DOD? Would that FMV be son's cost basis when he sells?

MW, much appreciate your kind assistance.  Thank you!!!

[rangerj]

Thoughts:

State law will determine ownership and title transfer date. If there was a gift to the son then the basis for purposes of a later sale will be determined by the gift rules for basis, in part of the asset or all of the asset depending upon what was transferred and when it was transferred. If title passes through the estate then the property is valued at FMV on the date of death, or the alternative valuation date if that is applicable. The FMV, to the extent applicable, becomes the beginning basis for the heir. Was the son living in the co-op rent free? If so, was the fair rental value considered a gift and was that considered relative to a gift tax return requirement? If the estate has income of $600 or more then a trust tax return may be necessary. This whole situation should be reviewed by an Estate tax/gift tax attorney. There is NO Statute of Limitations if a tax return is not filed. If there were any tax returns due to be filed and they were not filed you have an open ended transaction that can bring in the government at any time. This is not a good situation.   

[ej401]

Thanks much Ranger,

Not a good situation indeed. There must be a lot of hoi polloi with simple means who just want to help out their children and who are totally unaware of gift, estate taxes.  Unfortunately, even the real estate lawyer did not provide any information whatsoever about these issues.

From a Forbes article:
“The thing that makes state estate tax so sinister is it’s underneath peoples’ radar, but it’s got a sharp bite,” says Martin Shenkman, an estate lawyer in Paramus, N.J.

[rangerj]

Added thoughts: Estate and gift taxes are "transfer taxes". The federal lifetime exclusion, from taxation, is $1,000,000. There is an annual exclusion amount of about $14,000 and this does not reduce the lifetime exclusion. A gift in excess of the annual exclusion would necessitate a tax return, but MAY NOT require any tax, depending upon the lifetime exclusion that has been used. The state and local (typically County) transfer taxes generally also have an exclusion amount, but not generally as large as the federal amount. Again, seek the advice of a professional, that is a tax attorney, CPA. or Enrolled Agent with Estate and Gift tax experience.  

[ej401]

Thanks again Ranger. 

[mwcpa]

Actually, the federal "lifetime" exclusion is $5,340,000 for 2014, not $1,000,000.

[rangerj]

Thanks MW. Thanks to extensions I'm still mentally working on 2013. Even at 1 million only a small fraction of 1% of the population ever pay any of this tax, or the "death tax".

[ej401]

Federal "lifetime" exclusion is $5,340,000 for 2014. 

New Jersey has no gift tax.  New Jersey state estate tax exemption is $675K.  If gross estate of a NJ resident/decedent is $1,000,000, a New Jersey estate tax return is required but not a federal estate tax return.

Ten years before the decedent's 2014 DOD, he made a gift of $500K but Form 709 was not filed. Any consequences?

Thanks!

[mwcpa]

Any consequences.... yes.... the year is open and not closed....

www.forbes.com/sites/irswatch/2011/10/19/the-new-gift-tax-audits-irs-identifies-non-filers-using-state-property-records/

[ej401]

Thanks MW. 

www.forbes.com/sites/irswatch/2011/10/19/the-new-gift-tax-audits-irs-identifies-non-filers-using-state-property-records/

From above article: 
"As with any federal tax law violation, the government may impose severe consequences for violating the gift tax provisions. But one curious aspect of the new gift tax compliance initiative is that the majority of examinations likely result in zero assessed tax or penalties.... Because the Code bases the civil penalty amount on the amount of tax due, failure to file a gift tax return generally results in no penalty if the taxpayer’s gifts during the year triggered no tax”

$500K gift made in 2004.  Lifetime gift exclusion in 2004 it was 1million.  Hopefully, according to above statement in the article, in the event of an audit, there would be no tax or penalty due - right?

[rangerj]

True, most tax penalties are a percentage of the tax that is not reported, but there are also penalties that are for failing to file a return Generally information returns like Sub s, partnership, and 1099s for example. I do not know if there is a flat fee penalty for failing to file a gift tax return, but if there is there will also be interest added. If I get time I will look into this.

[ej401]

Thank you so very much Ranger!