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O.K., I must be missing something here. I think you're telling me that the proper approach is filing of a gift tax return at the time the joint tenancy is created. In my example, the house is worth $200,000, so $100,000 (or $90,000) of the unified credit is used up upon filing the gift tax return. Right so far?

Right so far.

You are saying that when the parent dies, the property is 100% includable in the parent's taxable estate, despite the earlier gift tax return filing. In my example, the house has grown to a value of $300,000.


Still right so far.

So, a further $300,000 of the unified credit is used up. Therefore, the total amount of the unified credit that has been used is $400,000 (or $390,000), on a house that was never worth more than $300,000. Can this possibly be right?

No, that's not what I'm saying, it's at this point that the confusion is arising. I apologize for not having made it clear.

Bottom line: $300,000 is taxable. Yes, you would file a gift tax return when the gift was made. Normally, you would include the amount of a gift in the estate tax base (that's really where you're using the unified credit, unless you actually pay gift tax because you've used up your unified credit, in which case you go a step further on the estate tax return by taking a credit for gift taxes paid).

However, in this case, because the $300,000 already includes the $90,000 prior gift, you do not include the 90,000 gift in adjusted taxable gifts and you get the full use of the unified credit. The bottom line, again, is that only the full value of the property, $300,000, is subject to tax.

It's sort of as if you were treated during your lifetime as having made the gift of $90,000 and having used some of your unified credit, but then since you died still holding your joint tenancy interest and the whole thing is included anyway under the estate tax inclusion rules, we go back and treat the transaction - as a whole - as if the gift were never made. You still, however, have wasted your $10,000 annual exclusion with respect to the donee joint tenant for the year in which the gift was made.

Chris Riser
criser
criser@mayer-riser.com
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