When it comes to your family’s legacy, every dollar you can save from tax collection counts. One way to keep your assets out of the hands of the IRS is the formation of community property trusts.
How does a community property trust (CPT) work?
CPTs save you money on taxes by adjusting or “stepping up” the basis of the entire property after the death of one member of the couple. When you and your spouse invest in property jointly — be it real estate, stocks, or other assets — it becomes what’s called community property if you live within nine applicable states. However, there are two states, Alaska and Tennessee, where community property can be utilized via the creation of a community property trust, even if you do not live in Alaska or Tennessee.
When couples work with their estate planning attorneys to create these trusts, they can take advantage of a double step-up on the property’s basis. The basis of the property is stepped-up to its current value for both members of the couple’s halves. This is different from jointly owned property which only receives the step-up on one-half of the property. That means capital gains taxes are much lower because the taxed amount is reduced thanks to the stepped-up basis. Community property helps couples reduce their income taxes after the death of a spouse.
Getting to know your basic CPT terminology
First, let’s start with a few quick definitions of the financial terms you will need to know to get a sense of whether or not a community property trust is right for you.
● 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: What you paid for an asset. The value that is used to determine gain or loss for income tax purposes. A higher basis means less capital gains tax.
● Stepped-up basis: Assets are given a new basis when transferred by inheritance (through a will or trust) and are revalued as of the date of the owner’s death. The new basis is called a stepped-up basis. A stepped-up basis can save a considerable amount of capital gains tax when an asset is later sold by the new owner.
● Double step-up: Because of a tax loophole, community property receives a basis adjustment step-up on the entire property when one of the spouses dies. So if a surviving spouse sells community property after the death of their spouse, the capital gain is based on the increase in value from the first spouse’s death (where the basis got adjusted on both spouses’ shares) to the value at the date of the sale. This allows the survivor to save money on capital gains tax liability.
One of the best parts of estate planning is that you get out so much more than you put in. In just a short amount of time, we can implement a community property trust that could save your spouse and family tens of thousands of dollars down the road. We are here to help make sure as little of your hard-earned property as possible ends up lost to taxation. Give us a call today, and set yourself up for a better tomorrow.