Love Lasting After Life: How and Why Community Property Trusts Trim Prices Over Time

When your time ends, costs such as tax collection eat away at your family’s legacy. Preserving money for your family’s welfare, community property trusts can reduce the price of taxation and minimize the amount of money “donated” to the IRS.

How does a community property trust (CPT) work?

CPTs “step up” the basis of the entire property after death of a spouse. When you and your spouse invest in property jointly, the assets become community property if you live within one of nine applicable states, including California. However, two states, Alaska and Tennessee, permit the creation of a CPT, even if you do not live in a community property state.

When working on a CPT with an estate planning attorney, couples can take advantage of a double step-up on the property’s basis. The basis of the entire property, including both spouse’s halves, is stepped-up to its current value.

In contrast, jointly owned property only receives the step-up on one-half of the asset. Therefore, CPTs lower capital gains taxes by increasing the basis. When a spouse dies, community property can reduce income taxes for the decedent’s loved one.

Basic CPT Terms

To figure out whether or not a community property trust is right for you, you should know a few basic terms:

  • Community property: Assets a married couple acquires by joint effort during marriage if they live in one of the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
  • Community property trust: A particular type of joint revocable trust designed for couples who own low-basis assets, enabling them to take advantage of a double step up. Tennessee or Alaska are the two places you can form these trusts.
  • Basis: The price you paid for an asset. The value is used to determine gain or loss for income tax purposes. A higher basis means less capital gains tax.
  • Stepped-up basis: When transferred by inheritance (through a will or trust), assets are revalued as of the date of the owner’s death and afforded a new basis. The new basis is called a stepped-up basis. When the new owner eventually sells the property, the stepped-up basis can save the seller a considerable amount of capital gains tax.
  • Double step-up: Under current tax law, community property receives a basis adjustment step-up on the entire property when one of the spouses dies. Therefore, if a surviving spouse later sells the community property, the capital gain is calculated using the increase in value between the time of the first spouse’s death to the value at the date of the sale. This adjustment saves the surviving spouse valuable income by decreasing capital gains tax liability.

Whether or not you use a CPT, taking time to plan your estate is a small price to pay for the invaluable peace of mind you and your family gain. Within a brief period of time, we can implement an estate plan that could save your loved ones tens of thousands of dollars down the road. To prepare for the future, an estate planning attorney can help you customize a plan that is right for you.

Disclaimer: All materials have been prepared for general information purposes only.  The information presented is not legal advice, is not to be acted on as such, may not be current at the time of review, and is subject to change without notice.  Further, the publication forms no attorney-client relationship and is not intended as a solicitation.  If the information provided might apply to your situation, you should seek qualified professional counsel on your specific matter.

 

About Author

star@starqlaw.com

An experienced legal professional, Star Q. Lopez is a wealth counselor and business advisor who offers estate and business planning, trust administration, and tax law advice. She possesses diverse and extensive experience in transactions, estate planning, and litigation. Her clients have encompassed federal agencies, U.S. veterans, veteran dependents, elderly, entrepreneurs, and large companies.

Early in her career, she managed teams in estate planning and tax preparation. Star served as a medical law advisor, federal contracts counselor, labor law litigator, and federal prosecutor during her time in the military. She has also advised on real estate transactions, administrative law, international engagements, and various legal assistance matters.

With a notable education, Star earned her Master of Law in Taxation from NYU Law School and her Juris Doctorate from UCLA School of Law. In a cohort of CEOs, VPs, and finance professionals, she has trained on business management at the University of Chicago Booth School of Business, where she continues to study Executive Management, Marketing, and Finance.

Also a U.S. veteran, Star is a U.S. Department of Veterans Affairs Accredited Attorney and is proud to guide her clients through the daunting process of VA claims. During Operation Enduring Freedom, Star served in the U.S. Air Force both domestically and overseas. With a husband who is a combat veteran of the U.S. Marine Corps, Star has a deep-seated appreciation for military veterans and is honored to offer all her clients top-quality legal advice.