Last week, I concluded the first part of this series by discussing the situation where someone is named as a beneficiary in a Will or Trust, but learns he won’t inherit anything because the property was never transferred out of joint tenancy and passes instead to the surviving joint tenant by operation of law. This failure to terminate a joint tenancy is usually the result of an error, not of an intentional act–people don’t make a Will for nothing.

A typical situation is one involving children of a prior marriage. Let’s say the husband remarries and prepares a trust dividing his assets in two. Half of his estate is to pass to his new wife and the other half to his children. Then sometime after the trust is created, he and his new wife decide to sell his old home and buy a newer, more expensive one. They use both of their savings and the profit from the sale of the old home to help buy the new one, which they purchase in joint tenancy. Neither of them think much of it at the time and the husband doesn’t consult with his attorney because, after all, this is a real estate purchase, not an estate planning decision.

The new home is in a different city, so the husband and wife close out their old bank accounts and open a new one together. You guessed it, the new account is in both of their names–in joint tenancy. Over the course of two or three years, virtually all of the husband’s separate property and separate accounts disappear. They are sold or closed out for one reason or another. When the funds are moved to new accounts, they are always in joint tenancy with the new wife.

After five years of marriage the husband dies. His children have copies of his trust and contact his new wife, with whom they are on good terms, to help her arrange his affairs. In the course of finalizing the husband’s funeral arrangements, the wife drops a small bombshell on his children. She inherits everything and they get nothing. They are left out of his estate completely.

Was this the result the husband intended? Did he mean to give his new wife everything acquired over his lifetime? Did he want his children to walk away without a penny? Did he realize the effect of holding all his assets in joint tenancy with his new wife? Maybe. Maybe not. We will never know. What we do know is that the well is poisoned and the children will never look at their stepmother the same again.

If the husband intended this result, he owed it to his children to tell them while he was alive so they wouldn’t blame his new wife for "stealing" their inheritance. If he didn’t intend this result, he should have consulted with an attorney to make sure the actions he was taking wouldn’t invalidate his estate plan.

We will never know what the husband wanted to happen. What we know is that the end result is far different than what we would have anticipated from reading his trust.

Tax consequences of creating a joint tenancy

There is something else you need to think about when you establish a joint tenancy–possible tax consequences.

If you create a joint tenancy with your spouse by buying property together or opening joint bank accounts, there aren’t any tax consequences because property can be freely transferred between a husband and wife.

If, however, you place property into joint ownership with someone other than your spouse, be sure to consider the tax consequences, especially if one of you is contributing significantly more than the other.

If you provide the entire purchase price for a home which is titled in your name and that of another, you are considered to have gifted half of the value of the property to your joint tenant. There are two exceptions to this general rule: (1) if you create a joint bank account with another, or (2) you purchase U.S. Savings Bonds. In these limited instances, you have not made a gift until and unless the funds are withdrawn from the joint account or the saving bonds are cashed by the non-contributor.

Just because there are tax consequences, this doesn’t mean you have to pay any tax. Under current federal law, the first $11,000 you give to each person each year is exempt from taxation. As long as the value of the one-half interest in property being conveyed is less than or equal to $11,000, you won’t pay any tax or even report the gift to the Internal Revenue Service.

If the value of the gift exceeds $11,000, you need to file a Federal Gift Tax Return on Form 709, but this still doesn’t mean you will pay any tax. During your lifetime you are allowed to give away up to $1 million. When you file a Gift Tax Return, you first deduct $11,000 from the value of the gift and then the balance is subtracted from your $1 million lifetime exemption. If, for example, the value of your gift was $110,000, you would report the entire amount on your Federal Gift Tax Return, deduct $11,000, and then subtract the remaining $100,000 from your $1 million lifetime exemption. This would still leave you with $900,000 which you could give away or leave to beneficiaries at your death and still not have to pay any gift or estate tax.

The answer to this question depends on your joint tenant. If you are the first to die and your joint tenant is your husband or wife, no estate tax will be due. When your surviving joint tenant dies, the jointly owned property may be subject to estate tax unless it passes to a new spouse or charity or the estate is small enough that it doesn’t incur a tax.

Next week we will discuss what happens if the joint owner is not your spouse. You’ll find the result may be significantly different.