Issues with jointly held assets

A “U.S. person” (citizen or green card holder) is subject to estate and gift taxes on their worldwide assets – i.e. regardless of whether the assets are situated within, or outside, the United States (see Internal Revenue Code, section 2001). Different considerations apply for a non-U.S. person – the asses included in their estate depend on type of property, location, applicable international estate tax treaties, and domicile. A non-resident alien (NRA) (i.e. someone living outside of the U.S. who is not a “U.S. Person”) is subject to estate taxes only on assets that are real and personal property located in the U.S., property transferred to a revocable trust within three years of the date of death, and stock in U.S. corporations (Internal Revenue Code, section 2104).

How are the assets that are jointly held by a U.S. person, or included in the estate of a NRA, treated for U.S. estate and tax purposes?

Assets which are jointly held with a right of survivorship will bypass probate, with the survivor automatically inheriting the asset.

If assets are jointly held by married couples, 50% of the value of the asset will be included in the estate of the first spouse who dies, without the need to prove that the surviving spouse contributed to the purchase of the property.

However, there are issues specific to jointly held assets that require consideration:
1. where unmarried persons jointly hold assets, the estate of the first to die must prove a contribution towards the purchasing of the property in order to only have half the value of the asset included in their estate for estate tax purposes;

2. jointly holding an asset may be contrary to the manner in which the assets is intended to pass under the terms of a decedent’s Will – the decedent may intend that the asset pass to Beneficiary A on the decedent’s death. However, if the decedent is the first joint tenant to die, the asset will bypass the decedent’s estate and form part of the estate of the surviving joint tenant, rather than being passed to Beneficiary A;

3. further, as estate tax is paid out of a decedent’s residuary estate, the decedent joint tenant’s estate will bear the tax liability on the decedent’s share of the jointly held asset even though that share of the asset does not form part of the estate that is available for distribution to the beneficiaries under the terms of the decedent’s Will.

Our upcoming whitepaper International Estate Planning for U.S.-Australia cross-border clients which is due for publication in April 2020 provides an in-depth analysis of international estate planning issues.

If you have any questions, please contact:
Renuka Somers
Senior Tax Advisor
U.S. Australia Tax Desk