Estate planning is all about ensuring the best possible future for you and your loved ones. A comprehensive estate plan has many components, and for some couples, a community property trust can be a valuable addition, especially if you have property or accounts that have significantly appreciated in value. Even if you don’t live in a community property state, this special type of trust can help reduce taxes and increase the value of your estate for your loved ones.
Why Community Property Trusts Are a Great Idea
The primary benefit of a community property trust is the step-up in basis it offers on community-owned property when one spouse passes away. This step-up means the tax basis of the entire property is adjusted – not just the half owned by the deceased spouse. As a result, if the surviving spouse chooses to sell the property, they will pay significantly less in capital gains tax, potentially saving a large portion of their wealth.
Here’s an example: Let’s say you and your spouse bought a property for $300,000, and it’s now worth $600,000. Without a community property trust, only half of the property would receive a step-up in basis when one spouse passes away. But with a community property trust, the entire property gets a new tax basis of $600,000. This could mean major tax savings if the surviving spouse decides to sell.
The Limits of Community Property Trusts
While community property trusts can offer big benefits, they’re not available everywhere. These trusts can currently be formed in five states: Alaska, Florida, Kentucky, South Dakota, and Tennessee. If you live outside these states, it’s still possible to set up a community property trust if you follow the state’s requirements.
It’s important to know that these trusts come with certain conditions – they must be funded properly and meet ongoing requirements to provide their full tax benefits. Additionally, they are not a one-size-fits-all solution. Depending on your situation, other estate planning tools might be more appropriate.
How Community Property Trusts Fit into Your Estate Plan
A well-rounded estate plan includes several important elements, such as revocable or irrevocable trusts, a power of attorney, a healthcare directive, and strategies to avoid probate. A community property trust works alongside these tools, but it only applies to the specific property you fund into it.
Since property cannot be managed by multiple trusts at the same time, it’s important to carefully decide which property and accounts should be included in a community property trust. The key is to ensure everything is properly aligned with your broader estate plan.
Is a Community Property Trust Right for You?
Community property trusts aren’t the right fit for everyone, but for certain couples, they can provide substantial tax savings. If you own highly appreciated property and are looking to protect your wealth for the surviving spouse, this type of trust may be worth considering.
If you’re unsure whether a community property trust is a good option for your estate plan, we’re here to help. Our team can review your current financial situation and estate planning documents to determine the best strategy for you and your family. Let’s work together to maximize your assets and minimize your tax burden.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, starting with a valuable and educational Life & Legacy Planning Session. This will allow you to get more financially organized and make the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.
To learn more about our one-of-a-kind systems and services, contact us or schedule a no-obligation 15-minute introductory phone call today.