Vague Deed Causes $330,000 Increase in Estate Tax
Failure to specify whether real property was deeded as tenants-in-common or tenants by the entirety created an additional $330,000 federal estate tax deficiency. In Goldberg v. Commissioner, a recent Tax Court case arising in New York, the decedent executed deeds for two pieces of property, both located in New York, to "Oscar Goldberg and Judith Goldberg, as wife." At the time the decedent, Oscar Goldberg, executed the deeds, he was married to Judith Goldberg.
After his wife's death in 2001, in that same year the decedent executed two deeds conveying all of Judith's interest in each of the two properties to a trust. Following the decedent's death in 2004, his estate listed one-half the value of each piece of property on Schedule E of Form 706. The Service assessed a deficiency of $330,432.96 based on its contention that the decedent owned the properties as tenants by the entirety with his wife, not as tenants-in-common.
State law determines whether and to what extent a taxpayer has an interest in property and federal law determines the tax effect of that ownership interest. Under New York law, absent any further language in the deed, a conveyance to a husband and wife creates a tenancy by the entirety. The rule is the same in North Carolina.
If property is held as tenants by the entirety, the surviving spouse becomes the sole owner of the interest in property owned by the married couple at the death of the first spouse, regardless of what the spouse's will may say. As a result, there is no separate interest of the first spouse that could be passed by will, deed, or intestacy (dying without a will).
On the other hand, if property is held as tenants-in-common, each tenant-in-common owns an undivided interest in the property that it can be transferred by will, deed, or intestacy. A tenant-in-common interest can also be reached by a creditor of just one of the tenants-in-common, while a tenancy by the entirety interest can only be reached by a creditor of both spouses on the same obligation.
This case does not mention Judith Goldberg's date of death, nor does it mention who were the beneficiaries of her trust. Depending on the circumstances, Mr. Goldberg's executor may have been able to avoid the problem altogether by executing a qualified disclaimer, but the case is silent on this issue.
While most real property owned by a married couple in North Carolina is held as tenants by the entirety, there are circumstances where real property owned by couples should be held as tenants-in-common. In that case, care must be taken to indicate that intention clearly in the deed, otherwise the law will deem the property to be held as tenants by the entirety, which defeats the planning goals and objectives.
