832 / Are joint interests includable in a decedent’s gross estate under IRC Section 2040?

Yes. IRC Section 2040 deals with all classes of property held jointly with a right of survivorship. This includes, for example, jointly held real estate, jointly held bonds, and joint bank accounts. IRC Section 2040 does not deal with other forms of co-ownership in which property interests pass at death other than automatically to surviving co-owners. Thus, tenancies in common and community property interests are includable under IRC Section 2033, not under IRC Section 2040.

The general rule of IRC Section 2040 requires that the entire value of the jointly owned property must be included in the gross estate of the joint owner who dies first, except such part as can be shown to have originally belonged to the survivor and never to have been acquired from the decedent “for less than an adequate and full consideration in money or money’s worth.”¹ Thus, the rule is as follows: if the decedent furnished the entire purchase price, the entire property is includable; if the decedent furnished only a part of the purchase price, only a corresponding proportion of the property is includable; if the decedent furnished no part of the purchase price, no part of the property is includable.² (But see below for the special rule applicable to spouses who own property jointly.)

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Planning Point: As a result of these rules, it is important that joint owners keep good records of the funding for the jointly-owned property.

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Where the joint owners are related (not spouses) and the survivor paid part of the purchase price, he must be able to prove that the funds did not come to him by way of gift from the decedent. In other words, the purchase price will be traced to its original source; and the burden of proof is not on the IRS but on the survivor. It is often difficult to prove the amount of contribution of the survivor to the joint ownership. If the assets of the joint owners became inextricably commingled prior to acquisition of the jointly owned property, proof may be impossible and the property will be wholly includable in the decedent’s gross estate.

But while money or property acquired by the surviving joint owner by gift from the decedent and contributed to the purchase price of the jointly held property is traced to the decedent for purposes of IRC Section 2040, income from property so acquired which is contributed to the purchase price is treated as the survivor’s own contribution for purposes of IRC Section 2040.³ Further, the IRS has ruled that where the survivor’s contribution to the purchase price of jointly held property was traced to proceeds from the sale of property acquired by the survivor with money received from the decedent by gift, the sale proceeds attributable to appreciation in value of the property during the period the survivor owned the property were treated as the survivor’s own contribution for purposes of IRC Section 2040. Also, consistent with the above-cited regulation, the Service ruled that sale proceeds attributable to income from the property received by the survivor and reinvested were treated as the survivor’s individual contribution.⁴

Revenue Ruling 79-372 is also consistent with earlier case law, as noted in the Ruling. However, the regulations call for a different result when the survivor’s contribution was of property received by gift from the decedent (rather than of proceeds from the sale of such property), which property had appreciated in value during the period held by the survivor. In this situation the regulations require that the portion of the purchase price attributable to such appreciation be traced to the decedent for purposes of IRC Section 2040.⁵

Where the property was acquired by the decedent and the other joint owner by devise, bequest, or inheritance, or by gift from a third party, the decedent’s fractional share of the property is included in his gross estate. For example, if the decedent’s father has conveyed the property by gift to the decedent and his wife in joint tenancy or tenancy by the entirety, one-half of the property will be includable in the gross estate of whichever spouse dies first.⁶

See Q 833 for a discussion of when a qualified joint interest is included in a decedent’s gross estate.