Ask Cari: How a Community Property Trust Could Save You Money in Taxes

When it comes to your family’s legacy, every dollar you can save from taxation counts. One way to keep your accounts and property out of the hands of the Internal Revenue Service (IRS) is to form a community property trust.

How Does a Community Property Trust Work?

Community property trusts can save you money on taxes by adjusting, or “stepping up,” the basis of the entire property after the first spouse’s death. Basis is generally the cost or value of an account or property at the time it was originally acquired by the owner. When you and your spouse invest in property jointly—be it real estate, stocks, or other assets—it becomes community property if you live in one of the following nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. However, there are five states—Alaska, Florida, Kentucky, South Dakota, and Tennessee—where community property treatment can be utilized via the creation of a community property trust, even if you do not live in one of these states or a community property state.

When married couples work with their estate planning attorneys to create these types of trusts, they can take advantage of a full step up on the property’s basis. At the death of the first spouse, the basis of the property is stepped up to the date of death value of the account or property. This is different from jointly owned property, which only receives the step up on one-half of the property—the half belonging to the deceased joint owner. A full step up in basis means the capital gains taxes are much lower if the surviving spouse wants to sell, because the value of the entire account or property has been adjusted. Community property helps couples reduce their income tax liabilities after the first spouse’s death if an account or property is sold.

Get to Know Community Property Trust 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 a community property trust is right for you.

• Community property: Accounts or property that a married couple acquires by joint effort during their marriage if they live in one of the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin
• Community property trust: A particular type of joint revocable trust designed for couples who have highly appreciated accounts or property, enabling them to take advantage of a full step up in basis even if they do not live in a community property state; they can be formed in Alaska, Florida, Kentucky, South Dakota, and Tennessee
• Basis: What you paid for an account or property, or 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: Accounts and property 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 if the value has increased since the account or property was acquired, or stepped-down basis if the value has decreased since the account or property was acquired; a stepped-up basis can save a considerable amount of capital gains tax when an account or property is later sold by the owner
• Full step up: Because of a tax benefit, community property receives a basis adjustment on the entire property when a spouse dies, so if a surviving spouse sells community property after their spouse’s death, 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—allowing the survivor to save money on capital gains tax liability

One of the best parts of estate planning is getting out 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 in taxes in the future. We are here to help make sure as little of your hard-earned property as possible is lost to taxation. Give us a call today, and set yourself up for a better tomorrow.