How a Community Property Trust Could Save You Money in Taxes
When it comes to your family’s legacy, every dollar you can save from taxation counts.
How Does a Community Property Trust Work?
Qualifying community property can receive a basis adjustment on both spouses’ shares at the first spouse’s death if at least half of the community interest is includible in the deceased spouse’s federal gross estate. The adjustment can increase or decrease basis, does not cover income in respect of a decedent, and is not automatic for every elective community-property trust. Basis is generally the cost or value of an account or property at the time it was originally acquired by the owner. When you and your spouse invest in property jointly—be it real estate, stocks, or other assets—it becomes community property if you live in one of the following nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin. Alaska, Florida, Kentucky, South Dakota, and Tennessee have elective community-property or special spousal trust arrangements, subject to each state’s requirements; the federal tax treatment of a particular arrangement requires separate analysis.
For a qualifying joint interest held only by spouses, generally one-half is included in the first spouse’s federal gross estate and that included portion generally receives a death-time basis adjustment; other joint ownership arrangements can produce different results. For property that qualifies for an upward death-time basis adjustment, a later taxable sale can produce less gain than it would at the old basis; a tax saving is not guaranteed.
Get to Know Community Property Trust Terminology
First, let’s start with a few quick definitions of the financial terms you will need to know to get a sense of whether a community property trust is right for you.
Community property: Accounts or property that a married couple acquires by joint effort during their marriage if they live in one of the nine community property states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin.
Community-property trust: A trust established under an applicable state’s elective community-property or special spousal trust law. State-law requirements and federal basis treatment require separate analysis.
Basis: The value used to determine gain or loss for income tax purposes. A higher adjusted basis can reduce gain on a taxable sale, but does not guarantee a tax saving.
Death-time basis adjustment: For qualifying property acquired from a decedent, basis is generally adjusted to its date-of-death fair market value, subject to applicable exceptions and valuation rules. The adjustment can increase or decrease basis, and a tax saving on a later sale is not guaranteed.
Community-property basis adjustment: A potential adjustment on both spouses’ shares under the federal conditions and exceptions described above. It can raise or lower basis and does not establish a tax saving for every elective trust or later sale.
One of the best parts of estate planning is getting out more than you put in. Ask your estate planning attorney whether a community-property arrangement fits your family and what federal tax treatment it may receive. Give us a call today, and set yourself up for a better tomorrow.