1977, June, Pg. 972. Estate and Trust Forum.

6 Colo.Law. 972

Colorado Lawyer

1977.

1977, June, Pg. 972.

Estate and Trust Forum

972Vol. 6, No. 6, Pg. 972Estate and Trust ForumEstate and Gift Tax Aspects of Spousal Joint Tenancies

"Marriage is a matter of more worth Than to be dealt in by attorney ship"---William Shakespeare 1 Henry VI v 5 55

Shakespeare's character, the Earl of Suffolk, would not speak the same words today if he could examine the Tax Reform Act of 1976(fn1) and the changes it made in the federal estate and gift tax treatment of assets owned jointly by husband and wife. Attorneys and other professionals engaged in the process of estate planning now must take a closer look at spousal joint tenancies in preparing to advise their clients of estate planning alternatives. In the past, estate planners in Colorado have utilized spousal joint tenancies primarily as devices for the avoidance of probate administration. Now, however, the Tax Reform Act of 1976 has altered the federal estate and gift tax provisions relating to spousal joint tenancies and has made joint tenancy ownership by husband and wife a more attractive estate planning tool for smaller marital estates in which "tracing of assets" ("establishing the source and amount of contribution") is difficult or impossible.

The Committee Report(fn2) set forth three main reasons(fn3) for the need for federal tax reform in the treatment of spousal joint tenancies. First, the provisions relating to joint tenancy property were unnecessarily complex. Second, the provisions could have resulted in the same property being subject to both the gift and estate taxes. And, finally, it was often difficult for spouses to determine the degree to which each spouse was responsible for the acquisition and improvement of their jointly-owned property.

The purpose of this column is to examine the tax aspects of spousal joint tenancies under the federal estate and gift tax provisions and under the Colorado inheritance and gift tax provisions. Pre-Reform Act law and current law will be outlined and examined, followed by some estate planning suggestions or considerations. No attempt will be made to deal with the federal changes in the estate and gift tax marital deductions or in the "contemplation of death" statute. These changes are important to any consideration of joint tenancy ownership, but the scope of this column could not give proper treatment to these two areas of change.

Pre-1977 Federal Estate Tax LawFor the estate of a spouse dying prior to January 1, 1977, there is a rebuttable presumption that the full value of the joint tenancy property at the decedent's death (or at the alternate valuation date under Section 2032 of the Internal Revenue Code) is included in the gross estate of the first spouse to die.(fn4) If, however, the estate of a spouse dying prior to January 1, 1977, can establish that the deceased spouse only furnished a portion of the consideration for the jointly-owned asset, only that portion will be included in the decedent's gross estate for federal estate tax purposes, and the presumption will be overcome.(fn5) Any appreciation in the value of the asset since the time the joint tenancy was created will be allocated in the same manner.(fn6) This allocation approach based on the portion of the consideration attributable to the donor is often referred to as the "consideration furnished" test.(fn7)

There is an exception to the consideration furnished test under both the pre-1977 federal law and the current federal law. To the extent that the joint property was acquired by the decedent and the surviving spouse by gift, bequest, devise or inheritance, only one-half of the value of the property is included in the gross estate for federal estate tax purposes.(fn8) Example: Husband's father dies and in his will devises the farm to husband and wife as joint tenants with right of survivorship. Total gross value of farm on husband's death is $100,000. Value of farm included in husband's gross estate for federal estate tax purposes is $50,000.

It is important to remember that the "joint tenancy" or "tenancy by the entirety" provisions of the Internal Revenue Code and the joint tenancy provisions of the Colorado inheritance tax statutes do not apply to "tenancy in common" interests.(fn9) If husband and wife own an asset as tenants in common, they each have an undivided one-half interest in the property (without right of survivorship), and only one-half of the value of the asset is included in the estate of the deceased spouse for federal estate tax purposes and for Colorado inheritance tax purposes.(fn10)

The current status of Colorado case law is that where a particular instrument is silent or ambiguous as to the nature of the joint estate created, the instrument will be construed as creating a tenancy in common and not a joint tenancy.(fn11) This requires that husbands and wives be carefully advised of the differences between the two types of ownership...