Joint Accounts — Are They Subject to a Decedent’s Tax Debts?

Tax liability for accounts with joint tenants with right of survivorship (JTWROS) — timing is everything!

November 13, 2008
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Chief Counsel Advice 200836030

Bank and investment accounts are often owned by two people as joint tenants with right of survivorship (JTWROS). This means that under state law, when one owner dies, the other becomes the sole owner of the property in the joint account. IRS attorneys recently looked at whether a person who becomes the sole owner of property held as JTWROS (because the other owner has died) also becomes liable for any of the decedent’s debts.

Facts. Individual A (we’ll call him Adam) transferred money to a JTWROS account, naming Individual B (Barb) as the joint tenant. Adam died. After his death, his tax return (for the time before death) was filed, showing a tax liability. The question was whether money in the JTWROS account (now owned by Barb) could be assessed to satisfy Adam’s tax debt.

Timing is everything. The answer depends on whether the liability arose before or after Barb obtained her interest in the account. If a debt arises before property is transferred, the property transferred is subject to the debt. If a debt arises after an interest in property is transferred, the debt does not attach to the transferred property.

State law controls. Under common law, transferring funds to a JTWROS account is a gift to the other joint tenant when the funds are transferred. However, state law where Adam and Barb resided specifically states that while joint tenants are alive, each owns an interest in the JTWROS property in proportion to his or her net contributions to the account (unless it is clear that there was a different intent). It is only when one of the joint tenants dies that his or her interest in the account is transferred to the survivor.

Adam’s tax liability arose before he died. But, his interest in the joint account did not transfer (under relevant state law) to Barb until his death. In other words, the property was transferred after the liability arose. So, Barb was liable for Adam’s tax liability to the extent of the balance in the joint account at Adam’s death.

Observation: In this case, only Adam contributed funds to the joint account. If Barb had also contributed funds, only the portion of the account attributable to Adam’s contributions would be subject to the tax liability.

From the Quickfinder Tax Tips newsletter from the Tax & Accounting business of Thomson Reuters, November 2008. To subscribe to this informative monthly newsletter, visit quickfinder.thomson.com or click here.