How Community Property Trusts Can Benefit Married Couples – Kiplinger’s Personal Finance

Location, location, location is not just vital in real estate. Where you live also can have critical tax implications for your taxes, especially for married couples.

There are two very different kinds of property ownership law for married couples in the United States: common law and community property law. Numerous variances exist in the particulars of these property ownership styles across the many states, but some general rules apply in each case. Any state that is not a community property state is a common-law state.

Community property states offer a distinct tax advantage for couples’ assets when one spouse dies. But if you live in a common-law state, there’s some good news: Several states have passed statutes empowering married couples living in any common-law state to establish a community property trust with a qualified trustee. The advantage they can gain is a step-up in cost basis at each death, something not previously available in common-law states.

Community property states

First, let’s briefly discuss what “community property” means. Nine states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — operate under community property laws, as does Puerto Rico. Under community property law, each member of a married couple owns one half of all the property, with all the rights of ownership. Usually, it is presumed that all property acquired during a marriage is community property, except property acquired by gift or an inheritance. But the law varies greatly among the community property states regarding some important matters — for instance, whether one spouse may identify some property as community property without the other spouse’s consent and whether an unsecured creditor can claim against any community property if both spouses did not sign the guaranty.

Under federal income tax law, IRC § 1014(b)(6), all community property (including both the decedent’s one-half interest in the community property and the surviving spouse’s one-half interest in the community property) receives a new basis at the death of the first spouse equal to its fair market value; in other words, the cost basis is stepped-up, and the assets may be sold without recognizing a capital gain.

Property in the sole name of the second spouse to die can receive a second step-up in basis, but there is no second step-up for those assets that were placed into irrevocable trusts prior to the second death (such a trust may be needed to shelter assets under the lifetime estate tax exemption or to qualify assets for the unlimited marital deduction, commonly referred to as A-B trust planning).

Common-law states

Under common law, married couples generally own assets either jointly or individually. When the first spouse dies, assets …….


Leave a Reply

Your email address will not be published. Required fields are marked *