Estate planning is a relatively simple subject with many details that make it complex and challenging to understand. You may already be familiar with the concept of community property. Still, when it becomes a community property trust, it starts to sound less familiar.
When it comes to marriage and community property, nine states use community property laws for married couples. Although Tennessee and Alaska are not among the community property states, both allow you to form a community property trust.
Here’s what you should know about community property trusts and how they can support your estate planning goals.
How does it work?
In the nine community property states, any assets you and your spouse purchase are automatically in the category of “community property.” Tennessee is not one of the nine states where you automatically acquire community property with a spouse. However, state law allows you to create a community property trust that can accomplish a similar outcome.
Unlike a community property state where your assets automatically acquire community property status, you and your spouse must choose assets to include in the trust and only those assets included in the trust acquire community property status.
How does it help?
A community property trust can help some couples avoid capital gains taxes after one spouse passes away in certain circumstances. This tends to be especially beneficial when a couple purchases an asset at a low price (basis) and the property increases in value while they own it.
Without a community property trust, a surviving spouse selling the asset would end up paying substantial taxes on the profit from the sale. However, a community property trust allows the basis of the asset to move up to the new fair market value, resulting in a decrease in taxes due on the gains from the sale.
A community property trust tends to be a beneficial option for a couple with low-basis assets that they intend to keep until one spouse passes away.