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Under the Internal Revenue Code, when someone sells an asset they must pay income tax on the amount above their “basis” in the property. In its most simplified sense, basis is the amount you paid for an asset when you purchased it, or if you received it by gift, it is the donor’s basis in the property. For example, if you purchased 100 shares of Microsoft stock for $10 per share, your basis would be $1000. If you sold these shares today you would pay income tax (at capital gain rates) on the sale price less $1000. The Internal Revenue Code also provides that when an individual dies, most property that he or she owns receives a “step up” in basis to its fair market value on the date of death.

Married couples who live in the ten Community Property states (Alaska, Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas Washington, Wisconsin) and hold their property as community property receive a full “step up” in basis to the date-of-death value upon the death of the first spouse to die.* Thus, residents of community property states receive a significant capital gains tax benefit by holding appreciated property as community property.

However, a married couple in the majority of states (the so-called Separate Property States), only that property owned by the deceased spouse receives this basis adjustment. Therefore, if each spouse owns 50% of the property, one-half of their property receives a step-up in basis. Even for residents of community property states this would be the result for their real and tangible personal property holdings in separate property states.

The Alaska Community Property Trust permits non-Alaska residents to “borrow” the Alaska Community Property law and avoid capital gains on their highly appreciated property upon the death of the first spouse. With this strategy, you transfer highly appreciated "separate property state" property to a trust drafted to take advantage of the Alaska Community Property Trust law, which includes the requirement that an Alaskan Trustee oversee the trust property. Then, upon the death of the first of you to die, the entire property steps up to its date-of-death fair market value. The survivor of you or your beneficiaries can then sell the property and be subject only to postdeath gains.

* Due to the temporary estate tax repeal, 2010 uses a "carry-over" basis scheme. We assume above that the first death occures in a "step-up" basis year.

 

Locations

Seattle
1833 N 105th St., #301
Seattle, Washington 98133
Phone: (206) 547-1412

Redmond
By Appointment Only
8201 164th Ave NE Ste 200
Redmond, Washington 98052
Phone: (425) 698-2214