ESTATE PLANNING ADVISOR

ESTATE PLANNING ADVISOR[i]

Vol.3, No. 6 February, 2002

JOINT TENANCY PERSONAL PROPERTY WITH NON CITIZEN SPOUSES:

DON’T DO IT

This Advisor explains the gift tax problems that can occur if a joint account, which has a non citizen spouse as a joint tenant, is created in personal property.

1. What’s the problem, are joint accounts with non citizen spouses treated differently than with citizen spouses?

Yes, and the consequences of forming these types of accounts with a non citizen spouse can be disastrous.

2. What’s the big problem?

Prior to July 14, 1988, if the creation of a joint account with a spouse, non citizen or not, created a gift, the gift was not taxable because of the unlimited marital deduction for gifts. However, Congress was apparently concerned that if one spouse created a joint account with, say, $5,000,000 of that spouse’s funds, with a non citizen spouse, if the donor spouse predeceased the non citizen spouse, the non citizen spouse would receive the entire $5,000,000 without any gift taxes. The non-citizen spouse could then return to his or her country of origin and the U.S. Treasury would never receive any estate taxes on the $5,000,000 when the non citizen spouse died in his or her country of origin.

3. Isn’t that the same thing a citizen spouse could do?

No, a citizen of the United States, the surviving spouse, is taxable on his or her world wide holdings, so the loss of revenue is prevented.

4. Would you provide an example, I am confused?

Sure. Let’s look at the legal rules first. Normally, I try to avoid citations and other complicated discussions, but in this case, it will aid in understanding. Let’s take it step by step in the transaction:

Creation of the account: The propertied spouse deposits $5,000,000 into a joint account in which the other joint tenant, who is the non citizen spouse of the propertied spouse, has made no deposit. Under, repealed (I know worrying about a repealed statute seems crazy, but wait until the next segment.) section 2515A of the Internal Revenue Code, each tenant is treated as owning one half of the account. That means that the propertied spouse has made a gift to the non citizen spouse of $2,500,000.
Unlimited marital deduction: Normally, having made a gift of $2,500,000, to a spouse wouldn’t matter because the propertied spouse is normally allowed an unlimited marital deduction and no gift tax is due and none of the propertied spouse’s $1,000,000, in 2002, is used up. Unfortunately, Internal Revenue Code section 2523(i) provides that there is no unlimited marital deduction for gifts to non citizen spouses.

To show where the rules of repealed section 2515A come into play, we will look at section 2523(i)(3), which states: “(3) the principles of sections 2515 [dealing with joint tenancy in real estate] and 2515A [dealing with joint tenancy in personal property] (as such sections were in effect before their repeal by the Economic Recovery Tax Act of 1981) shall apply, except that the provisions of such section 2515 providing for an election shall not apply.

As we learned earlier, section 2515A creates a one half interest in each spouse, and the propertied spouse, in our example, has made a gift to the non citizen spouse in the amount of $2,500,000

Section 2503 annual gift tax exclusion: To partially offset the inability of propertied spouses to make large gifts to non citizen spouses, section 2523(i) allows an annual gift tax exclusion for gifts to non citizen spouses of, in 2002, $110,000.

5. That means the creation of a joint, personal property, account in which a non citizen spouse is a joint owner can be a gift tax disaster, doesn’t it?

Yes it does, in our example, the propertied spouse has made a taxable gift of $2,390,000 and may not realize it for years, while penalties and interest continue to mount. All I can say, is, be very careful creating joint accounts with personal property.

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