In the state of Tennessee, married couples can take advantage of a unique asset called a community property trust. Since Tennessee is not a community property state, marital assets aren’t automatically considered community property. However, a community property trust can allow married couples to enjoy special advantages that they can’t get from joint ownership alone.
How does a community property trust work?
A community property trust is typically used to help married couples avoid paying massive capital gains taxes after one of the individuals dies. If the couple merely has joint ownership, the surviving spouse will probably have to pay taxes if they decide to sell the property. However, community property allows them to bypass this potential loss in profits.
When one of the spouses dies, the property will be valued at its current market value. If they’ve maintained the property and made improvements over the years, the surviving spouse has the potential to make a profit. To avoid paying capital gains taxes, the married couple can place the property in a community trust. As a result, the entire property will receive a “double step-up,” rather than the single step-up it would receive if the couple had joint ownership. Since the new basis matches the value of the property, the spouse can sell it without technically making a profit. As a result, they won’t have to pay capital gains taxes.
Typically, a community property trust is only valuable to spouses who own property and plan on selling it after one of the spouses dies. If you don’t plan on selling any property after your spouse’s death, you might not need one. However, it’s a great way to legally bypass capital gains taxes and pocket a much larger profit.
An attorney may help you create a trust
Planning your estate can be complicated, but an attorney may be able to come up with solutions that you never would have considered. Your attorney might help you find tax loopholes like these that prevent your family from getting stuck with estate taxes or capital gains taxes.