When a non-United States citizen spouse and a citizen spouse own real estate together, the legal concept of joint tenancy may affect their estate planning. Spouses often take title to property as joint tenants with a right of survivorship. This means that if one spouse passes away, the other spouse will own the property outright – without the need for the property to go through probate.
Estate Planning Consequences of Joint Tenancy
For estate tax purposes, the fact that property is held in joint tenancy by a citizen and non-citizen non-resident of the U.S. matters. The IRS applies a special rule called the contribution rule to figure out how much of the property’s value will be included in the citizen’s estate. The contribution rule requires that the entire value of the property to be included in the citizen’s estate, except for:
- Any portion contributed by the non-citizen non-resident spouse; and
- Any portion contributed on the spouse’s behalf as a gift, for example by inheritance.
(Internal Revenue Code § 2040(a); § 2056(d)(1)(B).) More frequently, the citizen spouse ends up with a large portion of the property’s value in his or her estate. If the citizen dies first, then his or her estate may owe expensive estate taxes on all or most of the value. Further, there is no marital deduction available for the couple. As a result, the non-citizen non-resident spouse will have full ownership of the property for the remainder of his or her life. But without the marital deduction, his or her estate could owe estate taxes on the entire value of the property. In effect, the couple is taxed twice.
Alternatives to the Joint Tenancy Problem
In California spouses often take title to property as community property of the marriage. Both spouses are considered to have contributed half of the purchase price if the property is purchased during the marriage. The community property rule supercedes the contribution rule for many spousal property purchases in California. However, the couple still runs into the problem that a non-citizen non-resident and citizen couple have no marital deduction available.
Instead of relying on the imperfect joint tenancy or community property systems, couples should consider setting up a qualified domestic trust. Property that changes hands by right of survivorship can fall under the marital deduction if moved to a QDOT. To make this happen, the surviving spouse must transfer the property to a qualified domestic trust before the deadline to file the deceased spouse’s federal estate tax return.
Planning your estate? Look to Janet Brewer, Esq. for thorough and thoughtful estate planning advice. Janet’s more than 20 years of legal experience will give you confidence and peace of mind. To schedule a “Get Acquainted” meeting, visit Janet's website or call her office at (650) 469-8206.