Tennessee is among 41 states that follow a common law property system. This system treats any assets acquired by one spouse during marriage as individual property. Community property states, however, would consider these assets as belonging to the couple.
Yet, Tennessee couples can nonetheless put their assets in community property trusts. These trusts are a variant of revocable trust that treat your assets as joint property. By forming one, you or your spouse may receive a tax break on assets sold after one of you passes.
How community property trusts work
You and your spouse’s property – like investments or real estate – may have gained in value since its acquisition. When one of you passes, the other may decide to sell these assets. If you two have a regular revocable trust, whichever of you survives the other would then pay significant capital gains taxes afterward. This is because only the deceased spouse’s basis – the price paid for the asset – gets revalued after their passing. The living spouse’s share will not experience this step-up in basis. And either you or your spouse will then have to pay taxes based on this original figure instead of a revalued figure.
Community property trusts instead give your assets a double step-up in basis. This means that both you and your spouse’s shares increase in value to the current market rate. Upon selling an asset, whichever of you survives the other will only pay capital gains taxes on the growth from its revalued figure. If you or your spouse sells an asset soon after the other’s passing, it may not increase in value at all. Thus, you could avoid taxation altogether.
When community property trusts make sense
Many couples will have no problem putting their assets in a revocable trust. Yet, your circumstances may be unique enough that creating a community property trust could make sense. You might want to do so if:
- You and your spouse own low-basis assets
- You and your spouse want to keep these assets until one of you passes
- The growth in value of these assets could subject them to capital gains taxes
By creating a community property trust, you can keep your estate’s value from diminishing due to taxation. An attorney with estate planning experience can guide you through the process of forming one.