Russ Cook & Associates, PC
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Community Property Trusts In Tennessee

In Tennessee, married couples have the opportunity to establish community property trusts (CPTs). These trusts, simply put, carry incredible financial benefits, allowing couples to significantly reduce burdens associated with capital gains taxes and related concerns.

This is a relatively new development. Tennessee’s Community Property Trust Act became law in 2010. As a result, a significant portion of couples in the state have yet to leverage CPTs to their advantage.

“Stepping Up” your estate’s value

The main benefit of CPTs is how the assets within them receive a “step up” in cost basis. Under federal income tax law, when an individual dies, his or her property is “stepped up.” What this means is that if an individual bought a stock for $100, and its value grows to $1,000 by the time of the owner’s death, the cost basis of the stock is increased—“stepped up”— from $100 (the purchase price) to $1,000 (the actual value). Heirs can then sell the stock for the full value without having to pay any capital gains tax on the sale.

Matters tended to get complicated, however, when couples owned assets together. Take the scenario where a married couple jointly owns a house that, over the course of their lives, increases in value from $30,000 to $300,000. Traditionally, when one of the spouses died, then only his or her share would be “stepped up” (from $15,000 to $150,000). As such, if the surviving spouse decided to sell the home, s/he would still be obligated to pay capital gains taxes on his/her share of the house.

Now, though, if a couple’s property is placed into a CPT, both shares will receive a “step up” in cost basis. This allows the surviving spouse, in many cases, to avoid significant tax obligations.

How it works

The logistics of how a CPT works are not overly complicated, though it’s important to have an estate planning lawyer help walk you through the process.

For example, after the sale of a jointly held “stepped up” asset, the survivor’s share passes directly on to him/her, while the deceased’s share will typically pass on to the estate or a revocable trust. Having an understanding of what this means, and how it will play out, is crucial to ensuring that you reap the full benefits of this potent estate planning tool.

 

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