How a Community Property Trust Could Save You From Heavy Taxation Down the Road

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. Last week, we discussed why integrating a community property trust (CPT) into your estate plan is a good idea and can result in a significant tax savings. This week, let’s dive a little deeper into how that process works.

How does a community property trust (CPT) generate tax savings?

CPTs create tax savings 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 are not a resident of Alaska or Tennessee.

When couples work with McDonald Law Firm 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, and greater tax savings.

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 result in a a considerable amount of capital gains tax savings 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 generate tens of thousands of dollars in tax savings for your spouse and family down the road. At McDonald Law Firm, we are here to help make sure as little of your hard-earned property as possible ends up lost to taxation. Give Andre O. McDonald, a knowledgeable Howard County estate planning attorney, a call today at (443) 741-1088, and set yourself up for a better tomorrow.

DISCLAIMER: THE INFORMATION POSTED ON THIS BLOG IS INTENDED FOR EDUCATIONAL PURPOSES ONLY AND IS NOT INTENDED TO CONVEY LEGAL ADVICE.