How Community Property Trusts Can Benefit Married Couples

Place, place, place is not just vital in real estate. Where you live also can have vital tax implications for your taxes, mainly for married couples.

There are two very uncommon kinds of material goods ownership law for married couples in the United States: common law and union material goods law. Copious variances exist in the essentials of these material goods ownership styles across the many states, but some general rules apply in each case. Any state that is not a union material goods state is a common-law state.

Union material goods states offer a evident tax benefit for couples’ assets when one spouse dies. But if you live in a common-law state, there’s some excellent news: Several states have passed statutes empowering married couples living in any common-law state to set up a union material goods trust with a certified trustee. The benefit they can gain is a step-up in cost basis at each death, a touch not earlier void in common-law states.

Union material goods states

First, let’s briefly discuss what “union material goods” means. Nine states — Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin — operate under union material goods laws, as does Puerto Rico. Under union material goods law, each member of a married couple owns one half of all the material goods, with all the rights of ownership. Usually, it is presumed that all material goods bought during a wedding ceremony is union material goods, except material goods bought by gift or an inheritance. But the law varies greatly among the union material goods states a propos some vital matters — for reason, whether one spouse may spot some material goods as union material goods without the other spouse’s consent and whether an unsecured creditor can claim against any union material goods if both spouses did not sign the guaranty.

Under federal income tax law, IRC § 1014(b)(6), all union material goods (counting both the decedent’s one-half appeal in the union material goods and the extant spouse’s one-half appeal in the union material goods) receives a new basis at the death of the first spouse equal to its honest market value; in other words, the cost basis is stepped-up, and the assets may be sold without recognizing a capital gain.

Material goods in the sole name of the second spouse to die can receive a second step-up in basis, but there is no second step-up for those assets that were placed into binding trusts prior to the second death (such a trust may be needed to shelter assets under the time estate tax resistance or to qualify assets for the boundless marital deduction, often referred to as A-B trust schooling).

Common-law states

Under common law, married couples commonly own assets either jointly or in isolation. When the first spouse dies, assets in the decedent spouse’s name, or in the name of a revocable trust, are stepped-up. Assets held jointly at death only receive a step-up in basis on half the material goods. And the assets in the extant spouse’s sole name are not stepped-up. But, when the extant spouse dies, assets held in his or her sole name can get a step-up in basis. Again, this doesn’t apply to assets placed into binding trusts before death.

With the portability of the time estate tax resistance, most couples seek trust schooling for fiscal establishment and certified handing out of wealth. A-B trust schooling may be beneficial to shelter assets that are probable to grow substantially after the first spouse dies or when the first spouse to die wants to tie up those assets for his or her young in case the extant spouse remarries and might choose to favor a second family.

Common-law states donation union material goods trusts

So far, five common-law states have passed union material goods trust statutes that empower a married couple to convert common-law material goods into union material goods. They are:

• Alaska
• Florida
• Kentucky
• South Dakota
• Tennessee

The purpose of union material goods trusts is to allow married couples living in the inhabitant state and others living in common-law states to also obtain a stepped-up basis up to all assets they own at the first death, just like in union material goods states. Residents who live in a common-law state that does not offer this trust key may still do a union material goods trust in one of the union material goods trust states but must appoint a certified trustee in that state.

The Tennessee Union Material goods Trust

Because I’m an adviser for a Tennessee-chartered trust company, I can only speak to the information of one union material goods trust: the Tennessee Union Material goods Trust. But, appreciative how this trust works will commonly prepare residents of other common-law states to thought-out this approach.

The Tennessee Union Material goods Trust Act (TCPTA) of 2010, Tennessee Code Annotated, Section 35-17-101, et seq., allows married couples to convert their party assets into union material goods. Each spouse is deemed to own an entire one-half appeal in every asset of a union material goods trust. Consequently, IRC § 1014(b)(6) (described above) applies in the same way as with union material goods states to provide a step-up in basis to the date of death value for the entire union material goods trust at the death of the first spouse to die.

Under the TCPTA, a union material goods trust can be voluntarily funded with some or all the couple’s assets, with no condition that assets be marital material goods. The grantors may conveying any material goods owned jointly or solely by either party into the trust. The grantors will set up their rights and obligations in the trust assets, in any case of when and where the material goods is bought or located, the disposition of those assets upon termination, death or another event, and any other matter distressing trust material goods that does not violate public policy.

To qualify under the TCPTA, a union material goods trust must follow certain rules:

1. Both spouses must be grantors.
2. The trustee must be a certified Tennessee trust company, bank, or inhabitant, counting either or both spouses who reside in Tennessee.
3. The trust must divide the assets equally if they divorce or must include terms that address the rift in the event of divorce.
4. The trust will be subject to creditors’ claims, but only one-half the assets are subject to each spouse’s creditors.
5. The grantors must be able to deliver or remove trust assets at any time, and such assets will no longer be union material goods.

The grantors may jointly amend or revoke a union material goods trust at any time. A single grantor may amend the trust to alter how that grantor’s assets will be disposed at death and may revoke the entire trust without the other grantor’s consent. The trust can be written to maintain other purposes that may be amended as well. 

At the first death, the trust assets must divide into a survivors’ share and a decedent’s share. These shares may then fund an binding survivor trust and an binding marital trust for the benefit of the extant spouse. Both these trusts will obtain another step-up in basis at the extant spouse’s death if by the book drafted. They will consequently avoid federal capital gain taxes for trust assets sold by a extant spouse and, again, avoid federal capital gain taxes when assets are sold by the extant spouse’s trust beneficiaries.

Also, the couple’s joint estate tax time exemptions may be applied to shelter the trust assets from the estate tax if certain strategies are employed. The extant spouse may be granted a general power of appointment in the survivor’s trust and may hold an boundless right to retreat all the survivor’s trust assets. The extant spouse may also elect that all or a shared part of the marital trust will be treated as a qualifying marital deduction trust or as certified mortal appeal material goods (QTIP).

Applying these strategies will cause each of the survivor’s trust and the marital trust to be includable in the extant spouse’s taxable estate for income and estate tax purposes, subject to his or her time estate tax resistance (plus any unused decedent spouse’s resistance) and allow the desired step-up in basis at his or her death.