Integrating a Community Property Trust Into Your Estate Plan

If you have highly appreciated assets, you may wish to consider a community property trust as part of your comprehensive estate plan. The community property trust is a special type of trust that treats a couple’s jointly acquired accounts and property as community property and can save a significant amount of taxes, even if the couple does not live in a community property state.

Why Community Property Trusts Are a Great Idea
The essential benefit of a community property trust is that the basis of community-owned property is adjusted (in many cases stepped up) when the first spouse dies. Not only that—it also steps up the basis for the entire property (rather than only the deceased spouse’s half, which is what happens with regular jointly owned property). The result is that the capital gains tax will take a much smaller percentage of the surviving spouse’s wealth if they decide to sell the community property.

The Limits of Community Property Trusts
There are five states in which community property trusts can be formed: Alaska, Florida, Kentucky, South Dakota, and Tennessee. These types of trusts must be funded and have ongoing requirements to achieve their tax benefits. So, they are not a solution for everyone, and do not necessarily fit every married couple’s situation.

How Community Property Trusts Fit with Other Estate Planning Strategies
If your estate plan is comprehensive, robust and ready for all of life’s potential successes and challenges, it likely includes documents such as a revocable or irrevocable trust, power of attorney, long-term healthcare power of attorney, and miscellaneous probate-avoidance precautions.

Community property trusts only work for the property that you fund into them, meaning that you can and should have other strategies in place, such as a revocable trust, will, or power of attorney, to ensure that you and your loved ones are properly protected. Property cannot be managed under multiple trusts at the same time, so it is important to determine which accounts and property you would like to be managed by a particular trust before settling on the details of your community property trust.

Community property trusts are not for everyone. However, if we determine that setting one up is an appropriate choice for you and your family, you can expect to save a large amount by avoiding taxes you would otherwise accrue. Give us a call today to see whether it might be an effective addition to your other estate planning strategies.