Tuesday, March 23, 2010

The Importance of Proper Vesting on Deeds

A recent Tax Court decision in favor of IRS highlights the critical importance of proper grantee-vesting on deeds and other instruments of transfer, and the potentially dire tax consequences of improper vesting.  The case involved the joint interest of a decedent's predeceased spouse in two parcels of real property, an interest that was held to be includible in decedent's gross estate for federal estate tax purposes. Because the transfer deeds creating the joint interest in each property did not expressly state the manner in which the spouses were to hold title, such interest was treated by the Tax Court as a tenancy by the entirety, which, under applicable state law, cannot be devised under a will.

In 1968, Oscar Goldberg, a resident of New York, acquired from his mother a fractional interest in each of two parcels of real property.

In 1977, Oscar, desiring to hold title to the property jointly with his wife, Judith, executed a deed transferring his fractional interest in each property as follows: "to Oscar Goldberg and Judith Goldberg, as wife" (sic). The property interests remained titled in that manner until after Judith's death.

In 2001, Judith died testate, and her will did not explicity mention either of the properties. Judith's will simply split her estate between Oscar and a family trust.

On December 31, 2001, Oscar, acting as executor of his wife's estate, executed a deed on behalf of the estate purportedly conveying to the family trust his wife's one-half interest in the properties.

In 2004, Oscar died. On the federal estate tax return filed for Oscar, his son, Mitchell, acting as executor, included only half the value of Oscar's interest in the properties as part of Oscar's gross estate, believing that the other half belonged to Oscar's predeceased wife, Judith. IRS, however, claimed that the entire interest in each property, not just half, was includible in Oscar's gross estate for federal estate tax purposes, and determined a deficiency against Oscar's estate in the whopping sum of $384,432.96.  IRS based its position on the fact that Oscar's 1977 transfer deed to himself and his wife had created a tenancy by the entirety between the spouses, such that Oscar automatically became the full owner of the property interests once Judith died, notwithstanding any provision in Judith's will to the contrary. In other words, if, in fact, a tenancy by the entirety existed under N.Y. state law, the property interests were not devisable under Judith's will.

On February 16, 2010, in a memorandum decision entitled, Estate of Oscar Goldberg, deceased, Mitchell D. Goldberg, Executor, v. Commissioner [T.C. Memo 2010-26, 99 T.C.M. 1120], the U.S. Tax Court held that IRS was indeed correct.  The Tax Court looked to the laws of New York governing trusts and estates, and ruled that the wording used in the 1977 transfer deed to vest title in the grantees created a tenancy by the entirety between Oscar and Judith. As a result, upon Judith's death, Oscar, as the surviving spouse, succeeded by operation of law to Judith's half of the property interests, becoming the owner again of his original (full) fractional interest in the properties. The purported transfer of property interests to the family trust by Judith's estate, on 12/31/2001, was null and void because Judith's tenancy-by-the-entirety interests were not subject to devise under her will.  Furthermore, because the 1977 transfer deed, on its face, clearly and unambiguously created a tenancy by the entirety under applicable state law, the Tax Court could not consider extrinsic ("parol") evidence to interpret what, if any, Oscar's intent may have been in wording the deed in the manner that he did.

To learn how the 1977 deed should have been worded in order to avoid this unfortunate result, please contact the writer, Keith Codron, Esq., at (800) 497-0864, or email him at keith@octrustlawyer.com.