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Joint ownership of property: two's company, but is three a crowd?

One of the most troubling areas in estate planning is the treatment of property owned as joint tenancy with right of survivorship (JTWROS) and tenancy by the entirety. This area becomes more troublesome when three-way JTWROS ownership of property is involved in the gross estate of a decedent spouse. As a general rule, tenancy by the entirety is limited to joint ownership of property by husband and wife and, in many states, only to their ownership of real property. Joint tenancy with right of survivorship permits co-ownership of both real property and other types of property (stocks, bonds, automobiles, bank accounts, etc.) between husband and wife or two or more persons--whether related or unrelated.

The distinguishing feature of both tenancies is the right of severance. This is the right a joint tenant possesses to terminate (end) the joint tenancy without the consent of the other co-tenant. For example, certain types of joint bank accounts may be terminated without the consent of the co-tenant(s). Generally, a tenancy by the entirety cannot be terminated or severed unless both co-tenants agree to the severance. In other words, the survivorship right cannot be destroyed without the co-tenant's consent. For example, one spouse cannot sell the family residence without the other spouse's consent.

The common feature of both tenancies is survivorship. Title extends to the whole property; and, upon the death of one joint tenant, the title is legally considered to survive in the surviving joint owner (co-tenant). Consequently, the first co-owner (co-tenant) to die has nothing to pass on or leave by will. This is because the surviving co-tenant already holds title to the property.

Hence, as a general rule, property owned as JTWROS is not part of the decedent's probate estate. Since jointly owned property with right of survivorship (or tenancy by the entirety) is generally not considered part of the decedent's probate estate, many people have the erroneous notion that the value of such property is not includable in the decedent's gross estate for Federal estate tax purposes.

However, this belief could not be further from the truth. Generally, some or even all of the value of jointly owned property may be includable in the decedent's gross estate for Federal estate tax purposes. In effect, I.R.C. 2040(a) provides that the value of the decedent's gross estate includes the value of all jointly-owned property except any part that originally belonged to the other co-tenant(s) and as never received or acquired by the co-tenant(s) from the decedent for less than an adequate and full consideration in money or money's worth. Herein lies the consideration-furnished test tax trap that can cause estate tax problems.

Considerations-Furnished Test

Generally, in order not to have the value of an asset owned as JTWROS includable in the decedent's gross estate, the decedent's personal representative must prove contribution by the surviving co-tenant(s). However, this rule does not apply to the ownership of property as JTWROS by U.S. citizen spouses. As a general rule, for estates of married U.S. citizen spouses dying after 1981, only one-half the value of the jointly owned property is includable in the decedent spouse's gross estate.|1~

Unfortunately, with respect to nonmarried persons, the decedent's personal representative must still trace the history of the assets owned by the decedent as JTWROS with another to the date the asset(s) was acquired by the co-tenant owners. The rules are complex and often it is difficult to prove the consideration-furnished test. Unless the evidence discloses that the asset originally belonged to the surviving co-tenant(s) and was never received from the decedent for less than adequate consideration, the presumption of includability in the decedent co-tenant's gross estate is not overcome. Thus, accurate recordkeeping by your clients is very important. Absent meticulous records, trying to prove who furnished the exact amount of consideration for the asset is not easy many years after the property was acquired. Such records should be retained forever.

You will generally become involved with the challenges associated with the ownership of property as JTWROS in one of the following situations:

* married couples who own some or all of their property in joint ownership with each other, their children or other members of their families;

* persons either married or unmarried about to take title to property of substantial value; or

* a single person who may be a surviving joint tenant and is contemplating taking, or has already taken, title to property as JTWROS with children, grandchildren or other family members.

This article focuses on the issues that must be addressed by the practitioner when a husband and wife own property as JTWROS with a third party: for example, a child, grandchild, nephew, niece, brother, sister or parent, other family members or unrelated individuals.

When the practitioner is confronted in the preparation of the United States Estate Tax Return (Form 706) by a three-way JTWROS ownership of property involving a decedent spouse, two issues must be addressed: (1) the extent to which the JTWROS property is includable in the decedent spouse's gross estate; and (2) the amount of such property, if any, which is eligible for the Federal estate tax marital deduction in the decedent spouse's gross estate. In order to effectively deal with these issues, the practitioner must be familiar with the rules affecting such an ownership arrangement.

Inclusion of Property in Gross Estate

As a general rule, for estates of married U.S. citizen spouses dying after 1981, the consideration-furnished test does not apply in determining the amount of JTWROS property includable in the decedent spouse's gross estate. Rather, the spouse's joint property rule is used. For the estates of married spouse decedents dying after 1981, the gross estate of the first spouse to die includes only 50% of the value of any and all property (real, personal or mixed) owned by the decedent and his or her spouse as JTWROS or as tenants by the entirety, regardless of which spouse furnished the original consideration for the acquisition of the property and provided the decedent and spouse are the only joint tenants.|2~

Observation: It has been held that the spouse's joint property rule does not apply to property acquired before 1977 by married spouses as JTWROS or as tenants by the entirety. In this regard, it has been determined that under the Tax Reform Act of 1976 (TRA '76), a spousal joint interest created before 1977 is specifically exempted from the 50% rule of I.R.C. 2040(b)(1). Section 403(c) of the Economic Recovery Tax Act of 1981 (ERTA '81) redefines qualified joint interest in I.R.C. 2040(b)(2); however, ERTA '81 403(c) does not change the non-applicability of I.R.C. 2040(b)(1) to pre-1977 spousal joint tenancy with right of survivorship interests.|3~

Accordingly, in the case of a husband and wife who acquired property as JTWROS or as tenants by the entirety before 1977 and where one of those spouses dies, 100% of the value of the jointly owned property may be includable in the decedent spouse's gross estate, except to the extent the surviving spouse can prove contribution to the acquisition of the property.

In other words, the spouse's joint property rule under I.R.C. 2040(b)(1) does not apply to such property; rather, the pre-ERTA '81 consideration-furnished test rule under I.R.C. 2040(a) applies. This means that the amount of jointly-owned property includable in the value of the estate of the first spouse to die will be proportionate to the consideration furnished by the decedent spouse at the time the property was acquired. Absent evidence of such consideration, 100% of the value of such property is includable in the gross estate of the first spouse to die as provided under I.R.C. 2040(a). Keep in mind, though, the holding in Gallenstein|1~ is presently binding only in the 6th Circuit Court of Appeals.

Eligibility for Marital Deduction

The second issue the practitioner must address in the preparation of the Form 706 when confronted by a three-way JTWROS ownership of property involving a decedent spouse is the extent to which such property is eligible for the Federal estate tax marital deduction in the decedent spouse's gross estate. In order for property interests to qualify for the estate tax marital deduction in the decedent spouse's gross estate, such interests must be includable in the decedent spouse's gross estate and must pass to the surviving spouse as beneficial owner.|4~

Moreover, and except as provided under I.R.C. 2056(b)(7), the property interest passing to the surviving spouse must be a deductible interest in order for the value of the property to qualify for the marital deduction in the decedent spouse's gross estate. In this regard, to be eligible for the estate tax marital deduction, the property interest cannot be a nondeductible interest or a terminable interest.|5~ A terminable interest is defined as an interest in property which ends upon the death of the holder of the interest or upon the occurrence of a particular event. Thus, except for Qualified Terminable Interest Property (QTIP) interests,|6~ no estate tax marital deduction is allowed if an interest in property passing to the surviving spouse will fail or terminate upon the lapse of time or the occurrence or failure of an event.|7~

However, I.R.C.2056(b)(5) provides an exception to the nondeductible terminable interest rule. The exception provides that if the surviving spouse has a power of appointment in that which otherwise would be considered terminable interest property in favor of the surviving spouse or the surviving spouse's estate, then such a property interest is eligible for the estate tax marital deduction. Such a power in the surviving spouse must be a power to appoint the entire property interest or a specific portion of the entire property interest as a qualified owner (and free of the trust if a trust is involved or free of the joint tenancy if a joint tenancy is involved).|8~

Moreover, such power of appointment in the surviving spouse must be exercisable by the surviving spouse alone and (whether exercisable by will or during life) must be exercisable in all events.|9~ A power is not considered to be a power exercisable by a surviving spouse alone and in all events if the exercise of the power in the surviving spouse to appoint the entire interest or a specific portion of it to oneself or to one's estate requires the joinder or consent of any other person. The power is not exercisable in all events if it can be terminated during the life of the surviving spouse by any event other than the surviving spouse's complete exercise or release of it.(10) In other words, the surviving spouse must be permitted to dispose of the property interest to whomsoever the surviving spouse chooses.

Thus, if the decedent devises property to the surviving spouse and a third party(s) as joint tenants with right of survivorship and, under local law, the surviving spouse has a power of severance exercisable without the consent of the other joint tenant(s) and by exercising this power could acquire an undivided interest in the property as a tenant in common, the power of severance will satisfy the condition that the surviving spouse has a power of appointment in favor of the surviving spouse or the surviving spouse's estate.|11~ This is because the surviving spouse would have the power to appoint the property free of the survivorship constraints of the joint tenancy. However, if the surviving spouse had entered into a binding agreement with the decedent spouse to exercise the power only in favor of their issue, that condition is not met.|12~

As a general rule, the value of property owned as JTWROS between married spouses is eligible for the Federal estate tax marital deduction in the decedent spouse's gross estate, provided the decedent spouse held title to the property as JTWROS with the surviving spouse and there are no other co-tenants.|13~

Examples

Example 1

On a warranty deed (or bargain and sale deed) to real property, the following inscription appears: Ted and Shelly Montgomery, Husband and Wife, tenants by the entirety with right of survivorship. In this situation, regardless of whether Ted or Shelley dies first, the marital deduction will be available to the first decedent spouse's estate because Ted and Shelley are the only co-tenants in title to the real property.

Example 2

On a warranty deed (or bargain and sale deed) to real property, the following inscription appears: Jerry and Agnes Tilford, Husband and Wife, tenants by the entirety with right of survivorship as to an undivided one-half interest therein: and Clyde and Laura Foster, Husband and Wife, tenants by the entirety with right of survivorship as to an undivided one-half interest therein.

In this situation, even though there are more than two co-tenants in title to the real property, the marital deduction would be available to each married couple in that Jerry and Agnes and Clyde and Laura are the only co-tenants with respect to their respective undivided one-half interests in the real property. Accordingly, for example, in the event Jerry predeceases Agnes, one-half the value of their undivided one-half interest in the real property would be includable in Jerry's gross estate and would pass to Agnes by right of survivorship. Thus, Jerry's estate would be entitled to a marital deduction for the one-half value of the undivided one-half interest included in his gross estate.|14~

However, when a third party becomes a co-tenant with the married spouses owning property as JTWROS, the possibility exists that a terminable interest will be created in the property interest passing to the surviving spouse; and loss of the estate tax marital deduction will occur with respect to the value of such property includable in the decedent spouse's gross estate which passes to the surviving spouse. This is especially true in cases where, upon the death of any one of the co-tenants, any balance in a joint account (i.e., bank account, street name brokerage account) becomes the absolute property of the survivor co-tenant and all or any part of the account may be withdrawn by, or upon the order of, any one of the co-tenants or the survivor without accountability to the other co-tenant(s).

Example 3

On April 20, 1965, more than 12 years prior to his death, Emil L. Jeschke (husband) with his own funds established a checking account at the Troy State Bank with himself, his wife, Ida G. Jeschke, and their son, Myron Jeschke, as joint tenants with right of survivorship. Upon Emil's death on July 24, 1977, the account contained $32,621.62--all deposited by Emil. The entire amount was treated by the personal representative of Emil's estate as passing to Ida, as joint tenant with right of survivorship and qualifying in full for the estate tax marital deduction pursuant to I.R.C. 2056.

On audit, the IRS determined that as to Ida's interest in the bank account, it constituted a terminable interest under I.R.C. 2056(b) due to the continuing joint tenancy rights of Myron. The bank account constituted a terminable interest because it was a demand account and Myron Jeschke could withdraw all of the funds in the account without his mother's consent. Accordingly, as of the date of Emil's death, Ida Jeschke's interest in the account was a terminable interest and the IRS reduced the estate tax marital deduction for the bank account in Emil's estate by one-half.|15~ The court observed that the legal status of the account at the time of the decedent's death governs the tax consequences.|16~

Just as Myron Jeschke could withdraw all of the funds in the account without his mother's consent, so too could Ida have withdrawn all of the funds from the account without Myron's consent. However, at the time of Emil's death, Myron and Ida each had the power to withdraw all of the funds from the account without the consent of the other. Whether Myron did (or did not) withdraw all of the funds in the account is not the issue.

The issue is Myron's power to withdraw all of the funds in the account. It is the existence of such power--not whether Myron actually exercised the power--that caused Ida's interest in the account to be a nondeductible terminable interest.|17~ This is because Myron possessed the power to terminate his mother's interest in the joint account assets (property).

Remember, an interest in property that ends upon the death of the holder of the interest or upon the occurrence of a particular event is a terminable interest. Thus, as a general rule, no estate tax marital deduction is allowed if an interest in property passing to the surviving spouse will fail or terminate upon the lapse of time or the occurrence or failure of an event. Remember, too, a power in the surviving spouse is not exercisable in all events if it can be terminated during the life of the surviving spouse by any event other than the surviving spouse's complete exercise or release of the power.|18~ Myron's power as a surviving co-tenant to withdraw funds from the account without accountability to Ida would constitute any event other than Ida's complete exercise or release of her power to withdraw funds from the account.

With reference to the amount of the marital deduction in Emil's estate, the IRS disallowed only one-half of the account ($16,310.81) as qualifying for the estate tax marital deduction. The IRS did so apparently under the mistaken belief that under Kansas law Myron Jeschke could only withdraw one-half the account without accounting to the other joint tenant--namely, his mother Ida. Nevertheless, even though on audit the IRS did not disallow the entire $32,621.62 as qualifying for the estate tax marital deduction, the court's holding in Jeschke v. United States|19~ effectively denies the estate tax marital deduction for the entire value (i.e., $32,621.62 in the Jeschke case) of the JTWROS property interests passing to the surviving spouse in fact situations similar to those present in Emil Jeschke's case. In this regard, the court observed that, with respect to whether the value of the joint account included in Emil Jeschke's gross estate qualified for the estate tax marital deduction, the legal issues involved were unaffected by the IRS' misinterpretation of Kansas state law concerning JTWROS accounts. In view of the court's observation, estate owners should not rely on the IRS repeating the same mistake it made in the Jeschke case.

Reference to the documents effected by the parties to a joint account is essential in determining the rights of the surviving co-tenants. These rights can be determinative of the extent to which the marital deduction may or may not be allowed in the gross estate of the decedent spouse. The form account card used by Troy State Bank to establish the joint checking account among Emil, Ida and Myron Jeschke as JTWROS contained three distinct sections: On the face of the card marked Checking Account--Individual, several authorized signature lines were provided for the signatures of anyone the originator of the account desired to permit to write checks on the account. No joint tenancy was created by such authorization.

On the reverse side of the card, there were two plainly marked sections with signature lines provided under each. One was entitled Joint Account--Two or More Signatures Required and the other was entitled Joint Account--Payable to Either or Survivor. It was the latter section that Emil, Ida and Myron signed. That section provided as follows:

We agree and declare that all funds now, or hereafter deposited in this account

are, and shall be, our joint property and owned by us as joint tenants with right of survivorship and not as tenants in common; and upon the death of either of us any balance in said account shall become the absolute property of the survivor. The entire account or any part thereof may be withdrawn by, or upon the order of, either of us or the survivor.

It is especially agreed that withdrawals of funds by the survivor shall be binding upon us and upon our heirs, next of kin, legatees, assigns and personal representatives.

/s/E.J. Jeschke /s/Ida Jeschke /s/Myron Jeschke.

The estate tax marital deduction may be partially allowed the decedent spouse's gross estate where the surviving spouse is entitled under state law to sever his or her interest in the jointly owned property without the consent of the other joint tenants and acquire an undivided interest as a tenant in common in the property.

Example 4

Kurt died on June 24, 1991. At the time of his death, he owned an interest in certain investment accounts and securities with his wife, Georgia, his daughter, Gina, and his son, Kurt, Jr., as joint tenants with right of survivorship by the terms of the applicable contractual arrangements relating to the accounts under Minnesota law. Kurt and Georgia had each furnished one-half of the consideration for the purchase of all of the joint assets. Neither Gina nor Kurt, Jr. had ever furnished any consideration for the purchase of the joint assets and neither had ever withdrawn or otherwise received any separate portion of the joint assets during Kurt's lifetime.

As a result of Kurt's death, Georgia, Gina and Kurt, Jr., as the surviving joint owners of the jointly held assets, became the sole remaining joint tenants with right of survivorship. Kurt's personal representative intended to include 50% of the value of the joint assets in Kurt's gross estate for Federal estate tax purposes and to take an estate tax marital deduction for the value of those assets passing to Georgia by right of survivorship.

As in Jeschke v. United States,|20~ I.R.C. 2056(b)(1) provides that certain terminable interests that pass to a decedent's spouse will not qualify for the marital deduction. I.R.C. 2056(b)(5) provides an exception to the nondeductible terminable interest rule. The exception provides that if the surviving spouse has a power of appointment in that which otherwise would be considered terminable interest property in favor of the surviving spouse or the surviving spouse's estate, then such a property interest is eligible for the estate tax marital deduction.

Such a power in the surviving spouse must be a power to appoint the entire property interest or a specific portion of the entire property interest as a qualified owner (and free of the trust, if a trust is involved, or free of the joint tenancy, if a joint tenancy is involved.|21~ In other words, the surviving spouse must be permitted to dispose of the property interest to whomsoever the surviving spouse chooses. Thus, if the decedent devises property to the surviving spouse and a third party(s) as joint tenants with right of survivorship and under local law the surviving spouse has a power of severance exercisable without the consent of the other joint tenant(s) and by exercising this power could acquire an undivided interest in the property as a tenant in common, the power of severance will satisfy the condition that the surviving spouse has a power of appointment in favor of the surviving spouse or the surviving spouse's estate.|22~

In Kurt's case, because he and Georgia each furnished one-half of the consideration for the purchase of the assets that were jointly held, one-half the value of this property was includable in Kurt's gross estate. Under Minnesota law, Georgia had the power to sever her interest in the jointly-owned property without the consent of the other joint tenants (namely, Gina and Kurt, Jr.). By exercising this power, Georgia could acquire a one-third interest as a tenant in common in the property includable in Kurt's gross estate. (The one-third interest is determined by the number of tenants in title to the one-half interest in the property includable in Kurt's gross estate--in this case, three: Georgia, Gina and Kurt, Jr.) Georgia's power of severance satisfies the requirement under I.R.C. 2056(b)(5) that the surviving spouse have a power of appointment in favor of the surviving spouse or the surviving spouse's estate. Additionally, Georgia had not entered into a binding agreement with Kurt to exercise the power of appointment only in favor of their issue.

Accordingly, a one-third proportionate share of the value of the joint tenancy with right of survivorship assets includable in Kurt's gross estate (which is one-half the value of the assets that were jointly held between Kurt, Georgia, Gina and Kurt, Jr.) will pass to Georgia from Kurt. The value of the interest in the joint property passing to Georgia qualifies for the Federal estate tax marital deduction under I.R.C. 2056.|23~

Where, under local law, absent direction to the contrary regarding three-way JTWROS ownership of property between married spouses and a third party, title is vested 100% in each surviving co-tenant, the decedent spouse's estate is not entitled to the Federal estate tax marital deduction for the value of property passing to the surviving spouse and other co-tenants. Recently, this author was retained by the accountant of a decedent's (Harry's) estate in a case involving a three-way JTWROS ownership of certain investment accounts and a checking account in which title to the accounts vested 100% in each surviving co-tenant; the decedent's surviving wife was one of the co-tenants.

Harry, a resident of Michigan, died on January 21, 1993. At the time of his death, he owned an interest in two investment accounts at Merrill Lynch Pierce Fenner & Smith (Merrill Lynch). Both accounts were so-called street name accounts. One account was titled in the names of Harry, his step-daughter, Dianna, and Harry's wife Mary, as joint tenants with right of survivorship. Another street name account with Merrill Lynch was titled in the names of Harry, his wife Mary and his nephew Charles as joint tenants with right of survivorship. Also included in the value of the gross estate was a checking account in the name of Harry or Mary (Harry's wife) or Dianna (Harry's step-daughter).

Harry had provided 100% of the consideration used to acquire the assets in both Merrill Lynch accounts and 100% of the funds in the checking account. Neither Mary, Dianna nor Charles had ever furnished any of the consideration for the purchase of the joint assets in either of the Merrill Lynch accounts or any of the funds in the checking account; and neither had ever withdrawn or otherwise received any separate portion of the joint assets during Harry's lifetime. As a result of Harry's death, Mary, Dianna and Charles, as the surviving joint owners of the respective Merrill Lynch accounts and the checking account, became the sole remaining joint tenants with right of survivorship of the respective accounts.

With regard to these three-way JTWROS ownership arrangements, Harry's personal representative raised the following questions:

* How much (amount) of each account should be included in Harry's gross estate for purposes of the Federal estate tax?

* Does the value (amount) of the Merrill Lynch accounts and checking account included in Harry's gross estate qualify for the Federal estate tax marital deduction in his estate?

As to how much of each account should be included in Harry's gross estate for purposes of the Federal estate tax, all three accounts were in effect joint tenancy with right of survivorship demand accounts in the names of the three respective signators. The agreement establishing the Merrill Lynch accounts provided that each of the signators

...shall have the authority on behalf of the joint account to buy, sell and otherwise deal...with |Lynch~ on behalf of the undersigned in said joint accounts as fully and completely as if he alone were interested in said account; all without notice to the others interested in said account. The authority hereby conferred shall remain in force until written notice of its revocation signed by one of the undersigned shall be received by |Merrill Lynch~. In the event of the death of any of the undersigned, the entire interest in the joint account shall be vested in the survivors... |emphasis added~

The checking account was governed by Michigan state law. In this regard, the Terms and Conditions of this account provided that:

If your account is in the name of two or more persons as joint owners, any or all of the joint owners may make deposits or withdrawals. The caption for your account will have the word "or" between the names of the joint owners. You agree that we may follow the orders or instructions of any one of the joint owners without becoming liable to the others. If one joint owner dies, his or her interest in the account passes automatically to the surviving joint owner(s). |Emphasis added~

Joint owners are jointly and individually liable for all obligations under this agreement, including any overdraft created by the other joint owners.

Even though Harry and Mary were husband and wife, the spouse's joint property rule did not apply because they were not the only joint tenants of the accounts. Accordingly, and in view of the fact that Harry provided 100% of the consideration for the accounts, 100% of the value of the accounts on the date of his death (or the alternate valuation date) was included in his gross estate and subject to Federal estate tax.|24~

The next consideration was whether the value (amount) of the Merrill Lynch accounts and checking account included in Harry's gross estate qualify for the Federal estate tax marital deduction in his estate. Upon Harry's death on January 21, 1993, the joint tenancy with right of survivorship accounts continued in the surviving joint tenants: namely, Mary and Dianna; Mary and Charles; and Mary and Dianna, respectively. In the State of Michigan, absent direction to the contrary regarding the joint tenancy account, title is vested 100% in each survivor(s).|25~ Because Dianna, with respect to the Merrill Lynch account and checking account bearing her name, and Charles, with respect to the Merrill Lynch account bearing his name, could respectively withdraw all of the funds in those respective accounts as of the date of Harry's death, Mary's interest as a surviving joint tenant in the respective accounts was a terminable interest and did not qualify for the Federal estate tax marital deduction.|26~

If Diana and Charles had, under I.R.C. 2518, each exercised a qualified disclaimer of their respective interests in the accounts, would such a disclaimer have enabled the interest passing to Mary (as one of the co-tenants by right of survivorship) to qualify for the Federal estate tax marital deduction? In this regard, the legal status of such accounts at the time of the decedent's death governs the tax consequences.|27~ Even if Dianna and Charles had under I.R.C. 2518 effected an otherwise qualified disclaimer of their respective interests in the accounts, such a disclaimer would not have changed the fact that at the time of Harry's death, Dianna and Charles, respectively, had the power to withdraw all of the funds in the accounts bearing their names, thus making Mary's interest in the accounts a nondeductible terminable interest. In Jeschke v. United States,|28~ discussed above, Myron Jeschke did disclaim his interest in the account bearing his name. As a result of that disclaimer, Myron was assessed a gift tax by the IRS, which resulted in a reduction in his unified gift tax credit.

Conclusion

When the practitioner is confronted in the preparation of the United States Estate Tax Return (Form 706) by a three-way JTWROS ownership of property involving a decedent spouse, two issues must be addressed: (1) the extent to which the JTWROS property is includable in the decedent spouse's gross estate; and (2) the amount of such property, if any, that is eligible for the Federal estate tax marital deduction in the decedent spouse's gross estate.

With respect to the first issue, the spouse's joint property rule does not apply in determining the amount of joint tenancy with right of survivorship property includable in the decedent spouse's gross estate. Rather, the consideration-furnished test applies in determining the extent to which the decedent spouse's interest in the JTWROS property is includable in the decedent's gross estate.

As to the second issue, the availability of the Federal estate tax marital deduction for the value of such JTWROS property includable in the decedent spouse's estate is determined by whether the surviving spouse has the power under local law to sever his or her interest in the jointly owned property without the consent of the other joint tenants. I.R.C. 2056(b)(1) provides that certain terminable interests that pass to a decedent's spouse will not qualify for the marital deduction.

I.R.C. 2056(b)(5) provides an exception to the nondeductible terminable interest rule. The exception provides that if the surviving spouse has a power of appointment in that which otherwise would be considered terminable interest property in favor of the surviving spouse or the surviving spouse's estate, then such a property interest is eligible for the estate tax marital deduction. Treas. Reg. 20.2056(b)-5(g)(2) provides that such a power in the surviving spouse must be a power to appoint the entire property interest or a specific portion of the entire property interest as a qualified owner (and free of the trust, if a trust is involved, or free of the joint tenancy, if a joint tenancy is involved). In other words, the surviving spouse must be permitted to dispose of the property interest to whomsoever the surviving spouse chooses.

Thus if the decedent devises property to the surviving spouse and a third party as joint tenants with right of survivorship and, under local law, the surviving spouse has a power of severance exercisable without the consent of the other joint tenant(s) and, by exercising this power, could acquire an undivided interest in the property as a tenant in common, the power of severance will satisfy the condition that the surviving spouse has a power of appointment in favor of the surviving spouse of the surviving spouse's estate; and the property interest passing to the surviving spouse by right of survivorship will qualify for the Federal estate tax marital deduction.

References

1 I.R.C. 2040(b)(1) and (2); contra Gallenstein v. United States, 92-2 U.S. Tax. Cas (CCH) 60,114 (6th Cir. 1992), aff'g 91-2 U.S. Tax Cas. (CCH) 60,088 (E.D. Ky. 1991).

2 I.R.C. 2040(b)(1) and (2).

3 Gallenstein v. United States, 92-2 U.S. Tax Cas. (CCH) 60,114 (6th Cir. 1992), aff'g 91-2 U.S. Tax Cas. (CCH) 60,088 (E.D. Ky. 1991).

4 I.R.C. 2056(a); Treas. Reg. 20.2056 (e)-2(a).

5 I.R.C. 2056(b); Treas. Reg. 20.2056 (b)-1(b).

6 I.R.C. 2056(b)(7); Treas. Reg. 22.2056-1.

7 I.R.C. 2056(b)(1).

8 Treas. Reg. 20.2056(b)-5(g)(2).

9 I.R.C. 2056(b)(5); Treas. Reg. 20.2506(b)-5(a)(4)

10 Treas. Reg. 20.2056(b)-5(g)(3)

11 Treas. Reg. 20.2056(b)-5(g)(2).

12 Treas. Reg. 20.2056(b)-5(g)(2).

13 I.R.C. 2056(c)(5); Treas. Reg. 20.2056(e)-1(a)(1); IRS Ltr. Rul. 9224010.

14 I.R.C. 2040(b) and 2056(c)(5).

15 I.R.C. 2056(b)(1); Jeschke v. United States, 87-1 U.S. Tax Cas. (CCH) 13,713 (10th Cir. 1987), aff'g 84-1 U.S. Tax Cas. (CCH) 13,562 (D. Kan.).

16 Jackson v. United States, 376 U.S. 503 (1964); Jeschke v. United States, 87-1 U.S. Tax Cas. (CCH) 13,713 (10th Cir. 1987), aff'g 84-1 U.S. Tax Cas. (CCH) 13,562 (D. Kan.).

17 See Rev. Rul. 55-518, 1955-2 C.B. 384; Rev. Rul. 75-350, 1975-2 C.B. 367; Estate of Hurd v. Commissioner, 160 F.2d 610 (1st Cir. 1947).

18 Treas. Reg. 20.2056(b)-5(g)(3)

19 Jeschke v. United States, 87-1 U.S. Tax Cas. (CCH) 13,713 (10th Cir. 1987), aff'g 84-1 U.S. Tax. Cas. (CCH) 13,562 (D. Kan.).

20 Jeschke v. United States, 87-1 U.S. Tax Cas. (CCH) 13,713 (10th Cir. 1987), aff'g 84-1 U.S. Tax Cas. (CCH) 13,562 (D. Kan.).

21 Treas. Reg. 20.2056(b)-5(g)(2).

22 Treas. Reg. 20.2056(b)-5(g)(2).

23 I.R.S. Ltr. Rul. 9224010.

24 I.R.C. 2040(a).

25 Michigan Statutes Annotated (MSA) 23.602(616)(2) and (3).

26 I.R.C. 2056(b)(1); Jeschke v. United States, 87-1 U.S. Tax Cas. (CCH) 13,713 (10th Cir. 1987), aff'g 84-1 U.S. Tax Cas. (CCH) 13,562 (D. Kan.).

27 Jackson v. United States, 376 U.S. 503 (1964); Jeschke v. United States, 87-1 U.S. Tax Cas. (CCH) 13,713 (10th Cir. 1987), aff'g 84-1 U.S. Tax Cas. (CCH) 13,562 (D. Kan.).

28 Jeschke v. United States, 87-1 U.S. Tax Cas. (CCH) 13,713 (10th Cir. 1987), aff'g 84-1 U.S. Tax Cas. (CCH) 13,562 (D. Kan.).

Doug H. Moy of Lake Oswego, Oregon, consulting specialist in estate/gift taxation and planning, is the author of the annually updated Estate Planning Simplified (Wiley Law Publications) and is retained by attorneys and tax practitioners nationwide. He is an active member of NSPA and since 1984 has appeared as a keynote speaker at NSPA's annual National Estate Tax Conference.
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Title Annotation:accounting for three-way joint tenancy with right of survivorship
Author:Moy, Doug H.
Publication:The National Public Accountant
Date:Jan 1, 1994
Words:6309
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