Tax Implications of Joint Tenancy with Rights of Survivorship (JTWROS)

Joint tenancy with right of survivorship (JTWROS) is a type of property ownership in which multiple people, typically spouses, hold equal shares, ensuring seamless transfer of property upon one's death without having to go through probate. It is important to understand any tax consequences when titling as a JTWROS.

When you buy a house or open a brokerage account, you will eventually pass it on to another person. More than one person can hold title to real property such as land and houses and some personal properties such as cars. This form of ownership is joint tenancy with right of survivorship.

JTWROS are common when spouses purchase a home. Some states still use the formula “tenants in the entirety,” but spouses are properly joint tenants with right of survivorship. When one spouse dies, the entire property passes to the other spouse without probate or even a will. JTWROS permits the surviving owner to remain in the home while distributing the remainder of the estate.

Joint tenancy property is not limited to real estate. Cars, boats, bank accounts, and brokerage accounts can all be JTWROS. Joint owners often use this method in estate planning to ensure the surviving joint tenant has access to the account.

There are benefits and drawbacks to using JTWROS as tax shelters. We’ll review some of the pros and cons of using this method for several popular purchases and other options you can use to pass your property on to your heirs.

Joint Tenancy with Spouse

When a property lists both spouses as joint tenants or co-owners of a property, the presumption is that they are equal owners unless there is language in the document saying otherwise. This is true for all property ownership.

Are transfers of property to my spouse subject to a gift tax?

The transfer of any property in joint tenancy to your spouse is generally not a taxable gift. Whether the property is a joint tenancy brokerage account, a house, or other titled property, transfers between spouses are exempt from gift taxes.

Are joint tenancy assets subject to estate tax when the first spouse dies?

No. Where partners are the sole joint tenants, only one-half of the value of the assets is part of the estate of the first spouse to die. However, because there is an unlimited estate tax marital deduction for property passing to a spouse (in joint tenancy or otherwise), a surviving spouse will not pay an estate tax on joint assets.

Be careful, however, not to over-utilize joint tenancy, as this can sometimes cause the family's estate tax burden to be substantially greater than it otherwise would be upon the death of the surviving spouse. If much of a family's assets are joint tenancy assets, it could invalidate the estate tax exemptions.

What happens to the assets in a joint tenancy for income tax purposes when a spouse dies?

The tax basis of property is either increased or decreased to its current fair market value upon the death of its owner. Tax basis measures gain or loss on the sale of the property.

In the case of a brokerage account held in joint tenancy by spouses, the tax basis for one-half of each asset in the brokerage account generally will receive a tax basis increase (or decrease) upon the death of the first spouse.

The surviving spouse may need to pay capital gains taxes when (or if) they sell the real property. There may be a 50% step-up in value, representing the deceased owner’s share of the sale value. This can reduce, but not eliminate, the capital gains tax.

Joint Tenancy with Non-Spouse/Child

Creating a joint tenancy with someone other than your spouse can result in a taxable gift. If the tenancy requires the consent of both tenants to remove or add funds, then any transfer becomes taxable. The amount of the gift depends upon state law.

What are the gift tax implications of joint tenancies with someone other than my spouse?

If a child is the joint tenant, the taxable gift is generally no less than one-half of the value of the property in the account. The annual gift tax exclusion may not apply to this gift. However, the lifetime estate and gift tax exemption may apply.

If you have a joint tenancy with anyone other than a spouse or relative (such as a business partner), it is unlikely the lifetime estate or gift tax exemption will apply. This is something you should discuss with your tax attorney prior to establishing the joint tenancy.

Estate Tax

Will my estate include my brokerage account assets if I add my child to my account? What about other joint tenancy assets?

For estate tax purposes, the fair market value of the property depends on the percentage each tenant contributed to the property value. If a child contributes nothing, the estate consists of the entire property value.

If several partners purchased a business property as joint tenants, the fair market value of the decedent’s estate would be the decedent’s purchase amount. However, if there is no record of each party’s contribution, the entire market value goes to the estate of the first tenant who dies. The survivors divide their remaining interest in the property.

The surviving joint tenants still own the property in full but pay the estate tax on the full market value of the entire property.

Income Tax

How is the income tax basis of the assets in the account affected when the other tenant dies?

Since each tenant holds an “equal and undivided share” of the property, each tenant reports an equal share of any income and deductions on their tax returns, regardless of how much they originally contributed. When the property sells or when it transfers upon one owner’s death, the full value transfers to the survivor. The survivor then declares the income and deductions on the full value.

Other Ownership Arrangements for Property Division

Joint tenancy with the right of survivorship works well for married couples since it ensures the property passes seamlessly and without tax consequences to the surviving spouse. For non-spouses, other methods may have better outcomes

• Named beneficiaries: When creating a brokerage account, you have the option of naming one or more beneficiaries to receive the assets when you die. The beneficiary may need to pay capital gains and income taxes on the account.

• Revocable living trust: A trust bypasses probate like JTWROS. Beneficiaries may receive distributions from the estate during your lifetime or after you die. You can structure the trust to pay some estate taxes.

• Tenancy in common (TIC): A tenancy in common shares ownership interests when parties do not share an equal interest in a property. Tenants in common share ownership of the entire property, but only to the percentage of their contribution. When one tenant dies, full ownership does not automatically transfer to the other owner.

Get Legal Advice from a Tax Attorney

When planning a joint tenancy for any type of property, you need thorough advice from an experienced tax attorney. Be sure you’ve covered all factors and tax questions before placing any of your property or money into any tax plan or trust account.