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DOWER AND COMMUNITY PROPERTY

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Assume a gift of land from Mom to son in joint tenancy. Is this a taxable gift? ... at a cheap price; mom and dad were broke, but son, Martin, gave them the money ... – PowerPoint PPT presentation

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Title: DOWER AND COMMUNITY PROPERTY


1
DOWER AND COMMUNITY PROPERTY
  • 2034, covering Dower, is obsolete
  • The battle to equalize the tax treatment between
    the community property and common law states was
    long and controversial and involved the income,
    gift and estate taxes.
  • There are still some differences between
    community property and common law states. For
    example, all (not merely 1/2) of community
    property gets a stepped up basis at the death of
    the first spouse to die even though only one-half
    of the value of the property is included in the
    decedents estate.

2
JOINT TENANCY
  • Here is a convenient bright line rule for the
    taxable estate joint tenancies are bad.
  • Joint tenancy ownership tends to over maritalize
    and is inflexible. Remember the example of the
    McDonald Estate.
  • There are situations when it is wise to use
    joint tenancies, for example, to simplify the
    transfer at death of an out of state vacation
    home. However, the probate method is almost as
    simple and speedy.
  • How to probate a joint tenancy land title and a
    joint tenancy bank account.

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4
JOINT TENANCIES CONTINUED
  • Spousal joint tenancies are treated differently
    from non-spousal joint tenancies for spousal
    joint tenancies only one-half of the value of the
    property is included in the estate of the first
    to die. The reason behind the rule is to deny
    the surviving spouse a step up in basis for the
    value of the entire property.
  • For non-spousal joint tenancies the entire value
    of the property is included in the estate of the
    first to die except to the extent the survivor
    can show contribution to its acquisition.

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7
JOINT TENANCY
  • Assume a gift of land from Mom to son in joint
    tenancy. Is this a taxable gift? What is the
    amount of the gift? What if this had been a bank
    account?
  • Assume a gift of land from Dad to daughter as
    tenants in common. Is this a gift? What is the
    value of the gift?
  • Later the joint tenancy is severed is this a
    gift?
  • Later the tenancy in common is severed. Is this
    a gift?

8
BASIS OF PRE 1977 JOINT TENANCIES
  • Gallenstein v U.S., 975 F.2d 286 (C.A. 6th)
    involved a joint tenancy in real estate where the
    husband paid 38,500 for the land in the 1940s.
    He died in 1987 when the land was worth 3.6
    million.
  • The wife the surviving joint tenant sold the
    land for that sum and claimed that was also her
    basis. Because the husband paid for it and
    acquired it before a law change in 1977, she wins
    and has no gain for income tax purposes. All
    spousal and non spousal joint tenancies created
    before 1977 are subject to this rule.
  • IRS would have allowed 1/2 of 3.6 million plus
    1/2 of 38,500 as her basis.

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10
MULTIPLE PARTY ACCOUNTS
  • Chapter 30.1-31, NDCC, provides rules for bank
    accounts between several persons.
  • All multiple party accounts accounts will possess
    the right of survivorship unless you provide
    otherwise in the documents creating the account.
    Sometimes this survivorship provision is called
    P.O.D., i.e., pay on death.

11
When will you recommend joint tenancies?
  • Never, in a taxable estate.
  • In a non-taxable estate, they simplify transfers
    from the decedent. For example, mom and dad take
    title to their vacation home in another state as
    joint tenants. When one dies, all that is needed
    to place good title in the survivor is an
    affidavit and a death certificate.
  • Even so, an ancillary probate is almost as quick,
    easy, and inexpensive. Moreover, joint tenancies
    are inflexible. I will give you an example of
    this problem.

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14
GOLDSBOROUGHS ESTATE
  • In 1946 mom gave property worth 25,000 to her
    two daughters.
  • In 1949 the daughters sold the property for
    32,500 their profit is 7500.
  • In 1949 the daughters bought other property with
    the 32,500 and put it in joint tenancy between
    themselves and mom. Mom dies in 1972.

15
GOLDSBOROUGH CONTINUED
  • When mom dies the property is worth 160,000
    the issue is how much is included in moms
    estate? The legal principle is that the full
    value is included in the estate of the first to
    die except for consideration supplied by the
    surviving joint tenants.
  • 7,500/32,500 times 160,00037,011 is the
    amount excluded from the full value of 160,000.
    The profit on the sale is the daughters only
    contribution to the acquisition.
  • What was the tax consequence of the transfer by
    the daughters to mom in 1949? A gift of one third
    of 32,500.

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17
CONTRIBUTION BY THE SURVIVING JOINT TENANT,
  • Mom and dad owned land and minerals in western
    North Dakota and borrowed money from a
    government lending agency with the land as
    security.. In the 1950s, when mom and dad
    defaulted on the loan the agency foreclosed, but
    later the government sold the land back to mom
    and dad, but the U.S. reserved 50 of the
    minerals later the government offered to sell
    its 50 mineral interest back to mom and dad at a
    cheap price mom and dad were broke, but son,
    Martin, gave them the money to buy the other 50
    mineral interest.

18
CONTRIBUTION BY SURVIVOR CONCLUDED
  • Dad died in 1958 in 1970, mom then put the land
    in joint tenancy between she and Martin in the
    late 1970s oil was discovered on the land
    then mom dies and Martin gets the land and oil
    well as the surviving joint tenant.
  • The issue. Can moms estate exclude 1/2 of the
    value of the minerals as that was contributed
    by Martin? How does he prove his contribution?

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20
ANOTHER REASON TO DISLIKE JOINT TENANCY
  • Hector had an 18 year old son from his first
    marriage his first wife died and he remarried.
    He wasnt rich, just had a house and about
    40,000 in savings, all in joint tenancy with his
    second wife. No one had a will.
  • With no warning Hector died, age 55, of a massive
    heart attack. His wife was so despondent she
    committed suicide a week later. Who got the
    house and savings. Her distant relatives living
    in a nursing home in Saskatoon. Joint tenancy is
    inflexible.

21
CONTEMPLATION OF DEATH GIFTS
  • 2035 applies now only to gifts that would
    otherwise be affected by 2036, 2037,2038, or
    2042, that is, life estates, reversions,
    revocable transfers, and life insurance.
  • For example a gift of a life estate by a life
    tenant or the release of a power to revoke by a
    donor of a revocable trust or the gift of a life
    insurance policy owned by the insured must occur
    three years before death to remove the property
    from his estate. We will cover the life
    insurance example in more detail later.

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23
THE PRACTICAL EFFECT OF THE REPEAL OF THE GIFT IN
CONTEMPLATION OF DEATH
  • Congress didnt give much away when it repealed
    the general rule on gifts in contemplation of
    death. Even though such a gift may not be
    includible in the estate, it is still a taxable
    gift, using up some or all of the applicable
    credit and perhaps requiring the payment of gift
    tax, which moves that individual up in the
    progressive rate brackets.
  • However, gifts that are exempt because of the
    annual exemption are not brought back into the
    estate as they were before the law change. So,
    one lying on his deathbed can give an unlimited
    number of 11,000 gifts without the fear of
    having them swept back into his estate.

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25
BROWN V. UNITED STATES
  • Husband, age 87, made gifts of 3,100,000
    requiring a gift tax of 1,415,000 his wife was
    a mere 72 years old, so he asked her to pay the
    gift tax. Trouble was, she had no money so he
    gave her that amount, she paid the tax, and then
    he died within three years. IRS claims that, in
    substance, he paid the tax and the 1,415,000
    must be included in his estate under the gross up
    rules.
  • The court found that the wife was a mere conduit
    for the funds and that the husband, in reality,
    paid the tax. The tax is grossed up.

26
MORE BROWN AND GROSS UP
  • The court discusses Estate of Sachs, p. 228.
    There the donor required the donees to pay the
    tax, that is, a so-called net gift, like in
    Diedrich v. CIR, p. 116. The 8th circuit held
    that the donor in effect paid the tax and grossed
    up the gift tax.
  • What if, in Brown, the wife paid the tax from her
    own funds? Would the result be any different?
    How could she?
  • What is the step transaction theory?

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28
CONTEMPLATION OF DEATH, CONTINUED
  • One strategy is the sale of a life estate to the
    remainderman on your deathbed. See U.S. v.
    Allen, and DAmbrosios Estate, textbook, p
    2224, 225. We will cover topic in more detail
    this later.
  • Note the problem of transfers from a revocable
    trust directly to a beneficiary. 2035(e) and
    the reason for the law change, p 233.

29
WHEN WILL YOU ADVISE THE CLIENT TO PAY GIFT TAXES
  • If gift taxes are paid the amount of the tax is
    included in the estate if the donor dies within
    three years of the gift.
  • The amount of gift tax paid is allowed as a
    credit against the estate tax when the donor dies
    so there is no double taxation should the same
    property be swept into the estate at death.
  • The very rich donor in good health may
    deliberately pay some gift tax to remove the gift
    tax paid from his estate. On page 223 is an
    example of yet another member of the Dupont
    family that did the government out of 23 million
    by making such gifts. At that time there was no
    3 year gross up rule.

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31
A LIMIT ON THE FREE STEP-UP IN BASIS.
  • Dad owns Blackacre with a fair market value of
    3,000,000 for which he paid 35. He has an
    offer to buy it at that price. Dad is in good
    health, but mom is very sick. Soooo, dad conveys
    Blackacre to mom on September 15th, mom dies on
    October 15th, leaving the land to dad by her
    will. Then dad sells the land on October 16th.
    What is his basis for determining his gain on the
    sale? See page 235.
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