Residents of community property states have tax benefits that we, residents of Tennessee, lack. One of these benefits is that when one spouse dies, the other receives their assets with a new basis (new value or cost). In Tennessee, the spouse would get the assets with the basis they had upon purchase, resulting in more tax liability if the surviving spouse decides to sell them. However, married couples in Tennessee can get the same tax benefits as community property residents with a community property trust.
The tax advantage of community property states
When a spouse in a community property state dies, the value of their assets is readjusted for tax purposes. When the deceased’s property passes down to their surviving spouse, the spouse will receive the property with an adjusted value, a stepped-up basis, according to inflation and the appreciation of the asset in question. That is, the asset steps up to its current market value.
This new basis is bigger than the one the asset had when the deceased acquired it. If the surviving spouse decides to sell the property, the difference between the selling price and the basis won’t be as big. Every person has to pay taxes when they sell an asset for a gain, so the smaller the difference of the selling price and the basis, the fewer taxes a spouse has to pay for the sale of an asset, if any.
What happens in Tennessee
In Tennessee, this would be different. Instead of getting a step-up basis in an asset or property, spouses in Tennessee receive the property with the initial value, not the current one. This means that if they decide to sell it, their gains will be bigger in the eyes of the law. The bigger the gain, the more taxes they have to pay.
Community property trusts
A community property trust allows married couples in Tennessee to achieve the same tax benefits as those who live in community property states. It is a joint trust in which a couple’s assets get a step-up basis immediately after placing them in the fund. Then, when one of them dies, the property receives another step-up basis, which results in a double step-up in total. By setting this trust, the surviving spouse won’t lose most of their profit to capital gains taxes if they decide to sell the asset in the future.
An efficient estate plan
By setting up a community trust with your spouse, you can prevent them from losing a great amount of money to capital gains taxes if they decide to sell your assets in the future. That way, you can ensure your spouse retains as much of your wealth as possible. You have worked for your estate all of your life, and you wouldn’t want the Internal Revenue Service to end up with a big share of your estate because of taxes.