How Community Property Trusts Can Help Your Estate Planning

You should consider establishing a community property trust when making your estate plan. Such a trust combines assets you and your spouse acquire jointly into community property, even in common law states, while reducing the taxes you must pay.

In a community property state, when one spouse in a marriage dies and leaves property behind, a significant tax burden could result when the remaining spouse sells the property. However, the right kind of trust could increase the basis of the property on the death of the first spouse. Such a step up could reduce capital gains tax on the sale of the property.

Which Assets Are Considered Community Property?

In a community property state, community property includes nearly all assets acquired by either spouse during marriage, such as:

• Income
• Real estate
• Bank accounts
• Retirement plans

Separate property is anything either spouse acquires before marriage or, while married, receives as an inheritance or gift.

Benefits of Community Property Trusts

A community property trust holds assets a married couple jointly owns. Each spouse has equal interests in the property and can use them during their lifetime. When one spouse dies, the property gets a new basis equal to the fair market value at the time of the death.

The cost basis also steps up the basis of the surviving spouse’s share of the property. That means the capital gains tax will affect much less of the surviving spouse’s wealth upon selling the property.

Establishing a community property trust in an estate plan is crucial if your goal is to avoid significant tax consequences and readjust the basis for the deceased and surviving spouse’s interests in the community property.

How to Incorporate a Community Property Trust into Estate Planning

You might already have an estate plan to protect your assets, family, and future. Creating a healthcare directive, power of attorney, and a revocable living trust is common. However, married couples often overlook community property trusts when they execute other types of trusts without realizing the benefits they’re missing.

You must fund property into a community property trust for the trust to be effective. You can use the trust with other estate planning strategies, such as a will or power of attorney. Before finalizing your community property trust, deciding which assets you want to protect in other ways is essential. You can’t manage the same property under different trusts simultaneously. You must avoid including those assets in the new trust you and your spouse establish.

Determine Whether a Community Property Trust Is Suitable for You

A community property trust isn’t an appropriate estate planning tool for everyone. You might already have a method for obtaining tax advantages and don’t need to set up this type of trust. However, you should consider whether creating a community property trust with your spouse can shield you or your spouse from significant taxes and secure your financial future.

Contact an experienced Orange County estate planning lawyer today at (800) 244-8814 to learn more about your options. We can review your assets and determine whether a community property trust can meet your needs. 

If you have any further questions about estate planning and strategies to shield your wealth, or if you’d like to have your current asset protection plan reviewed to make sure it still meets your needs, please contact us at our California asset protection office at 800-244-8814 to set up a consultation.