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Five non community property states – Alaska, Florida, Kentucky, South Dakota and Tennessee, currently allow married couples to create community property trusts (CPT).
The benefit of a CPT is the potential income tax savings to a surviving spouse via the full ‘step-up’ in basis of a home or other trust assets that occurs when the first spouse dies when assets held in the CPT are later sold.
There are likely a lot of negatives to establishing a CPT including complexity, cost and limited asset protection.
My financial situation leads me to conclude that I do not require a CPT for my wife to avoid capital gains on our JWROS appreciated home should I predecease her due to the home gain exclusion available under IRC 121. I was at a continuing education course regarding probate earlier this month and the attorney speakers briefly spoke about the availability of community property trusts.
If you want to know more about CPTs just google “What is a community property trust”. After reading the comments on a few law firm websites you will then know as much (or as little) as I do about community property trusts.
Best, Bill
Bill: In non-community-property states — without the use of a community property trust — I assume that only half the value of jointly owned property would get the step-up in cost basis to the value as of death. Is that correct?
Yes, your understanding is correct.
The Kitces article that Rick’s reply links to is a good, no trying to sell a service, nonlegal, non state specific, read on both the pros and cons of adopting a community property trust. If I were still considering a community property trust for us I would then find a local attorney with appropriate experience for an in depth discussion as my next step.
In my planning if I die before my wife she would likely sell our home and move to be near our daughter for non-tax reasons. Her sale of the home after I died, while a tax event that would require reporting in the year the sale occurs, is unlikely to have a taxable gain because of the IRC 121 home gain exclusion and the step-up of my 50% ownership of our home to FMV upon my death.
The vast majority of my assets will pass via beneficiary designations or joint ownership to my wife. If my wife had the intent to live in our home for the remainder of her life after I die we would likely transfer the home to a revocable living trust (RLT) so the transfer of the home (or likely its value) to our children could occur without being subject to the probate process. We still have a small balance on a mortgage secured by our home and my understanding it is difficult to transfer a home to a RLT that still is encumbered with a mortgage. I am unsure of current legal costs and transfer costs of such a transfer but I expect they would not be nominal based on my past experience as a CPA.
I am trying to make post death administrative matters simple while also taking appropriate actions to keep the tax cost low when possible.
Jonathan, that is my understanding. Here is a lengthy article from Michael Kitces that discusses this and offers a potential strategy for couples in separate-property states. There are some good examples that show how the survivor’s basis is calculated.