Integrating a Community Property Trust into Your Estate Plan

Being cautious and relying on trust when planning your estate is the most effective approach to guarantee a better life for you and your loved ones. However, a thorough estate plan involves various components. Couples who own assets or property that have significantly increased in value over time can benefit greatly from community property trusts. These trusts treat jointly owned accounts and property as communal assets, resulting in notable tax savings, regardless of whether the couple resides in a community property state.

Why Community Property Trusts Are a Great Idea

The primary benefit of a community property trust is that the basis of community-owned property is adjusted (in many cases stepped up) when the first spouse dies. Not only that—it also steps up the basis for the entire property (rather than only the deceased spouse’s half, which is what happens with regular jointly owned property). This means that the capital gains tax will take smaller percentage of the surviving spouse’s wealth if they sell the community property.

The Limits of Community Property Trusts

There are five states in which community property trusts can be formed: Alaska, Florida, Kentucky, South Dakota, and Tennessee. These types of trusts must be funded and have ongoing requirements to achieve their tax benefits. So, they are not a panacea, and do not necessarily fit every married couple’s situation.

How Community Property Trusts Fit with Other Estate Planning Strategies

If your estate plan is strong and prepared to handle various life situations, it probably includes important documents like a revocable or irrevocable trust, power of attorney, long-term healthcare directive, and other measures to avoid probate.

Community property trusts only work for the property that you fund into them, meaning that you can and should have other strategies in place, such as a revocable trust, will, or power of attorney, to ensure that you and your loved ones are properly protected. You cannot hold a property in multiple trusts simultaneously, so it’s essential for us to determine which accounts and property you want to be handled by a specific trust before finalizing the specifics of your community property trust.

Community property trusts are not for everyone. However, if we determine that setting one up is an appropriate choice for you and your family, you can expect to save a large amount by avoiding taxes you would otherwise accrue. Give us a call today to see whether it might be an effective addition to your other estate planning strategies.