DOWER AND COMMUNITY PROPERTY

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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• 2034, covering Dower, is obsolete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.

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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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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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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?

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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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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.

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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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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.

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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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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.

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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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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.

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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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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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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.

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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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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.

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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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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.