Question

If a partner has a joint ownership interest with his wife in a partnership and he dies, How is his estate tax on the ownership calculated assuming 100% is taxable?

Answer 1

The estate tax consequences associated with joint tenancy ownership of property depend upon whether the property is held jointly by a married couple or by other individuals. A related question is the income tax basis the surviving tenant(s) receive in the property upon the death of a joint tenant.

Husbands and Wives--Tenancy by the Entirety. Under IRC Sec. 2040(b) only one-half of the value of property held in joint tenancy by husband and wife is included in the gross estate of the first spouse to die. And even that amount is not subject to estate tax because it will be deductible under the unlimited marital deduction provisions of Sec. 2056. Thus, at first blush it appears that the estate tax consequences associated with joint ownership of property by husband and wife are simple and quite favorable. However, there are two glitches to be taken into account: 1) the income tax basis for the surviving spouse in the jointly-held property; and 2) the impact of jointly-held property on the use of the unified transfer tax credit of Sec. 2010.

Because only one-half of the jointly-held property is included in the gross estate of the deceased spouse, the related income tax basis rules permit a step-up in basis to the date of death value on only one-half of the property. That is, only half of the property will take a basis equal to the property's fair market value (FMV) at the date of death of the deceased spouse. The other half of the property will keep the basis it had while both husband and wife were alive.

On the other hand, if the property had been separately owned by the deceased spouse and had passed to the survivor by will, the basis of the property in the hands of the surviving spouse would be the FMV of the entire property. Overall, then, the joint ownership of property by husband and wife can leave the surviving spouse at a substantial disadvantage income tax- wise, especially if a sale of the property is anticipated soon. This is especially true today when net long-term capital gains are taxed at the same rates as ordinary income.

Example: Mario and Maria Jersey owned Blackish as joint tenants. Mario paid $60,000 for Blackacre in 1995 and placed the property into joint tenancy ownership with his wife Maria. No gift taxes were payable since the unlimited gift tax marital deduction applied. Mario died in 1998 when Blackish was worth $200,000. Maria's income tax basis in Blackacre is $130,000 (1/2 of $60,000 plus 1/2 of $200,000). Thus, if Maria sold Blackacre for $220,000 in 1999, she would have a gain recognized of $90,000 ($220,000 minus $140,000), upon which she would pay income tax of $13,770, assuming that her marginal income tax rate is 15.3% for 1999. If the property had been kept in separate ownership by Mario and then passed to Maria by will, Maria's basis would have been the full $200,000 date of death value. In that case, she would have a gain on the sale of only $20,000 ($220,000 minus $200,000) rather than $90,000, and her income tax would be $3,060 (15.3% of $20,000) rather than $13,770; a tax savings of $10,710.

For tax purposes, both federal and state taxes, are assessed on the estate’s fair market value, rather than what the deceased originally paid for its assets. Anything in the estate that is bequeathed to a surviving spouse is not counted in the total amount and isn’t subject to estate tax.