Holding assets such as bank accounts, securities, or real estate jointly is common, especially among married couples.  Joint ownership also may be used by cohabitants and elderly individuals who want a younger person to be able to pay bills, handle investments, etc.

There probably will be income, gift and estate tax consequences of joint ownership.  Here are the rules.

INCOME  TAX

If income-producing property is held jointly by a married couple filing a joint tax return, the income tax consequences are straightforward… the couple owes tax on the income.

But what if the married couple files separate returns?  Or if the co-owners aren't married and thus can't file a joint return?  Typically, the income will be taxed 50-50 between the joint owners.

If the funds in a joint account belong to one person, that person's name is listed first on the account, along with his/her Social Security Number. If the joint account contains combined funds, each person's share of any income from the property is determined by state law.

Example:  Sam Miner has put his niece Sarah's name as joint owner with right of survivorship on his bank and brokerage accounts so that she can help manage his affairs if it should become necessary.

Sam and Sarah should make sure that Sam's Social Security number is the one on the account, so that each annual Form 1099 reports income taxable to Sam, not to Sarah.

GIFT  TAX

Putting a spouse's name on property as joint owner won't trigger gift tax because spousal gifts are untaxed. The situation is different for non-spouses and non-US-citizen spouses, though.

Generally, putting someone's name on an account won't trigger a gift if assets aren't withdrawn by the noncontributing joint tenant.  (There may be exceptions under some state laws.)

Adding a joint tenant to real estate becomes a taxable gift if the new joint tenant has the right under state law to sever his interest in the joint tenancy and receive half of the property.

Example:  As above, Sam puts Sarah's name on his accounts. As long as Sarah leaves those accounts alone, no gift is incurred.

Trap:  Say that Sarah takes $20,000 from Sam's bank account. A gift tax return may have to be filed and gift tax might be owed.

Strategy:  Sarah should keep careful track of her use of Sam's assets. If she writes a $20,000 check to an assisted-living facility, for example, to provide care for Sam, no gift will have occurred.

On the other hand, if Sarah writes that $20,000 check to buy a car for herself, that will be a gift from Sam unless she can show that the car was used solely for Sam's care.

Caution:  Joint accounts owned by unmarried couples are potentially troublesome. Suppose, as above, Bill Smith and Carol Jones are unmarried but living together. Bill earns the income, which goes into a joint account.

Trap:  Every check that Carol writes might be considered a gift if she uses the funds to pay for her personal expenses. That's true even if Bill writes checks to pay for personal items that Carol has charged on a credit card.

This problem isn't easy to resolve if Carol spends more than $12,000 from the account on herself -- that's the annual gift tax exclusion for 2006.

Strategy:  Keep careful records of all expenses from joint accounts. Money that is used for common expenses generally won't be considered a taxable gift.

ESTATE  TAXES

Property held as "joint tenants with right of survivorship" (JTWROS) must go to the survivor. This might create estate tax problems.

Example:  Dan and Ellen Collins are married and have $4 million in assets. Everything is owned as JTWROS. They are also the beneficiaries of each other's retirement accounts. If Dan dies in 2006, everything will pass to Ellen, who will now have a $4 million estate.

Trap:  This arrangement prohibits them from leaving anything to other heirs, including their children, upon Dan's death. Thus, they won't be able to use the federal estate tax exemption, set at $2 million for 2006 to 2008.

Suppose, in our example, Ellen dies in 2007 with the $4 million estate. That would be $2 million over the exemption amount, taxed at 45%, so the federal estate tax bill would be $900,000.

That tax could have been avoided with a $2 million bequest at Dan's death in 2006. That bequest might have gone to their children, for example, or to a trust structured to benefit Ellen but be out of her estate.

Strategy:  Families with estate tax concerns should modify their use of joint ownership between spouses. Each spouse should have some assets in his own name that can be left to other parties or to a trust at the first death, sheltered by the estate tax exemption.

CAPITAL  GAINS  TAX

When assets pass from a decedent to heirs, estate tax is not the only concern. Under current law, appreciated assets get a step-up in basis as of the date of death. (An alternative valuation date, six months later, also may be used for all estate assets, if this produces a lower estate tax.) This step-up can eliminate capital gains tax.

Example:  Ed Russell owns $1 million in stocks and stock funds, held outside of retirement plans. His basis in those securities is $200,000.

A sale during Ed's life would result in an $800,000 capital gain and a $120,000 tax bill, assuming all the securities qualify for the 15% rate on long-term gains.

Assuming no predeath sale, if Ed owns those securities by himself and leaves them to his wife, Phyllis, she'll have a stepped-up basis of $1 million. She could sell them after his death for $1 million and owe no capital gains tax.

Trap:  If Ed holds these stocks as JTWROS with Phyllis, they will all pass to her at Ed's death but only half (Ed's half of the joint account) will get a basis step-up, giving her a $600,000 basis ($500,000 in his half and $100,000, or half the original cost basis, in her half). As a result, a sale for $1 million would produce a $400,000 capital gain ($1 million minus her new $600,000 basis) and a $60,000 tax bill, at 15%.

Strategy:  Highly appreciated assets might be held in sole name rather than jointly, to get a full basis step-up.

The rules are a bit different in the states with community property laws (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, as well as in Puerto Rico). A spouse can leave his or her half of community property to a nonspouse. But, if community property is left to a spouse, the spouse who inherits might be able to get a full basis step-up.

In the above example, if they live in a community property state, Phyllis may get a $1 million basis on the securities she holds, after inheriting Ed's half.

If so, she can sell the shares after Ed's death for $1 million and owe no capital gains tax. Check with a professional adviser to see if specific actions (such as putting community property in writing) are necessary in your state to qualify for a full basis step-up.

(Source:  Sanford J. Schlesinger, Esq., Schlesinger Gannon and Lazetera LLP, 2007)