What Is the Consideration Provision in Estate Tax?

The consideration provision is an Internal Revenue Service (IRS) rule that helps determine how much of an asset’s value is included in a deceased person’s gross estate for tax calculations. The provision is most frequently applied to assets owned jointly with others or to specific types of transferred property, such as life insurance policies. Its purpose is to accurately reflect the decedent’s economic interest in an asset at the time of death, ensuring the correct amount is subject to estate tax.

These rules only affect estates large enough to be subject to the federal estate tax. For 2025, the federal estate and gift tax exemption is $13.99 million per person. However, this high exemption is scheduled to change. On January 1, 2026, the exemption is set to revert to its previous, lower amount, which is projected to be approximately $7 million per person after inflation adjustments.

Inclusion Rules for Jointly Owned Property

When an individual owns property as a joint tenant with rights of survivorship (JTWROS) with someone other than a spouse, the IRS applies a default rule. The presumption is that 100% of the property’s fair market value is included in the gross estate of the first joint owner to die, regardless of legal ownership percentages. The entire value is taxed unless the surviving joint owner can prove they contributed to the asset’s acquisition.

The exception to this 100% inclusion rule is the “consideration furnished” test. This test allows the estate to exclude a portion of the property’s value if the surviving joint owner can demonstrate they provided their own funds toward the purchase price or capital improvements. The amount excluded is proportional to the survivor’s contribution. For example, if a survivor proves they paid for 40% of the original purchase price, then only 60% of the property’s value at the date of death is included in the decedent’s estate.

The survivor’s contribution must come from funds that were not acquired as a gift from the decedent. Acceptable forms of consideration include money from personal savings, independent earnings, or the assumption of a mortgage liability. Funds received as an inheritance from a third party and then used for the property purchase would also qualify.

The rules are simpler for property owned jointly by a married couple. For spouses who hold property as joint tenants with rights of survivorship or as tenants by the entirety, the asset is a “qualified joint interest.” In this scenario, the consideration furnished test does not apply, and 50% of the property’s value is automatically included in the estate of the first spouse to die.

Taxation of Life Insurance Proceeds

The full death benefit of a life insurance policy is included in the estate if, at the time of death, the decedent possessed any “incidents of ownership” in the policy. These are rights that give the policyholder economic control over the insurance contract, including the ability to:

• Change the beneficiary
• Surrender or cancel the policy
• Assign the policy to another person
• Borrow against its cash value

The consideration concept becomes relevant when a life insurance policy is transferred to another person or to an irrevocable trust to remove it from the estate. If the decedent transfers ownership but dies within three years of the transfer, the “three-year rule” pulls the full value of the proceeds back into the gross estate. This rule prevents last-minute transfers designed solely to avoid estate tax.

A transfer of a policy can sometimes involve consideration. If the policy is sold to a new owner for its fair market value, it is a transfer for valuable consideration and can successfully remove the proceeds from the seller’s estate. To exclude life insurance proceeds, the decedent must relinquish all incidents of ownership, and the transfer must occur more than three years before death.

Proving Contribution to Exclude Assets

For a surviving joint owner to apply the consideration furnished test and exclude a portion of a property’s value, they must provide clear evidence of their contribution. The burden of proof falls on the estate and the surviving owner. This requires a well-documented tracing of funds from the survivor’s separate assets to the jointly owned property.

The most effective evidence includes cancelled checks from the survivor’s personal bank account made payable for the property’s down payment or mortgage. Bank statements showing a significant withdrawal that corresponds with the property’s purchase date are also useful. For real estate, closing documents that list the survivor as a borrower or detail the source of funds can be persuasive.

Beyond the initial purchase, contributions toward capital improvements that increase the property’s value can also be counted. To prove these contributions, the survivor should retain all receipts for materials and labor, contracts with builders, and permits for the work performed. Without adequate proof, the default rule of full inclusion will apply, potentially leading to a higher estate tax liability.