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How a community property trust can benefit married couples

On Behalf of | Mar 18, 2023 | Estate planning |

Community property states offer tax advantages to some married couples. Thanks to recent legislative changes, married people in common-law states, such as Texas, can now enjoy some of these advantages by establishing a community property trust.

What is a community property trust, and how can it benefit you?

How do community property states differ from common law states?

In a community property state, each spouse owns half of all the marital property. When a spouse dies in a community property state, both that spouse’s share of the property and the surviving spouse’s share receive a step-up in value that is equal to the fair market value. This makes it possible for the surviving spouse to sell assets at the current fair market value without paying capital gains taxes.

By contrast, in a common-law state, all property is either jointly or individually owned. When a spouse dies, only half of the jointly owned property receives a step-up basis and any assets individually owned by the surviving spouse do not get a step-up.

What does a community property trust do?

Community property trusts allow married couples to convert individual assets into community property. This allows federal income tax law to apply to the property in the trust the same way it does in a community property state.

Currently, only Alaska, Kentucky, Florida, Tennessee and South Dakota have established community property trust statutes. However, residents of Texas can take advantage of this tool by executing a community property trust in one of those states and appointing a trustee in the same state.