What is a Community Property Trust?
Ten states in the U.S. are classified as “community property” states, in which each partner in a marriage is considered to own half of the assets acquired during the marriage. Although community property jurisdictions constitute a small minority of states, individuals who are subject to community property laws make up a significant minority of the U.S. population, especially as two of the ten community property states are the two most populous states in the country, California and Texas. The others are Arizona, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.
If you are an Ohio resident reading this blog post, you may be wondering how community property laws affect you, since Ohio is not a community property state. The answer is that a small, but growing, number of states, are allowing married couples to opt in to community property treatment for some or all of their assets. Those states include Alaska, Florida, South Dakota, and Tennessee, and most recently, Kentucky, through the Kentucky Community Property Trust Act (KCPTA, or “the Act.”)
Ohio couples who want their property to be treated as community property can do so through the Act, so long as they have a Kentucky trustee: either a Kentucky resident, or a trust company or bank that is authorized to act as a trustee in the state of Kentucky. Tennessee and Florida are other states that offer community property trusts to out-of-state residents, with the requirement that the trustee is a qualified trustee in the state authorizing the community property trust.
What are the Requirements of a Community Property Trust?
A couple who wants a community property trust must create the trust together and contribute assets to it. The trust document must show that the spouses intend to treat property contained in the trust as community property. The trust must be signed by both spouses and expressly state that it is a Kentucky community property trust. The trust must also include certain specific notice language.
If the trust has multiple trustees, at least one of them must be a Kentucky trustee as described above. The trust also needs to provide for the distribution of one half of the trust to be distributed to each spouse in the event of divorce or dissolution (unless the spouses have an enforceable agreement not to do so).
If one spouse has a debt that is their separate obligation (such as student loan debt incurred before the marriage), their debt can only be satisfied out of their half-share of trust assets. Under Ohio law, to the extent a trust contains community property, either spouse acting alone can revoke the trust, but the consent of both spouses is required to amend the trust.
What are the Advantages of a Community Property Trust?
Many people who consider creating a community property trust do so for the purpose of obtaining a double step-up in basis. When the first spouse of the couple dies, only half of each asset in the trust can be included in that spouse’s estate for purposes of estate tax. However, 100 percent of each asset in this type of trust receives a step up in basis for purposes of federal income tax. Contrast this with the tax treatment of jointly-held assets in other jurisdictions; in non-community property states, only the half-interest of the deceased gets the step up. Accordingly, a community property trust can provide a significant tax benefit to couples in certain situations.
Who Should Consider this Type of Trust?
Community property trusts can expand estate planning options for many couples, but there are some people who can benefit more than others. You and your spouse may want to consider creating a community property trust if:
- You are in a long-term, stable marriage, and neither of you has children from previous relationships.
- You and your spouse own property that has appreciated significantly since you acquired it.
- You own significant real property.
- You are comfortable creating a trust that complies with the statutory language, and do not want to deviate from that language.
What Kind of Assets Should Go Into a Community Property Trust?
In general, assets that benefit the most from community property treatment are jointly held assets that, if not in a trust, would be considered marital property, such as:
- Portfolios of publicly-traded securities
- Real property, especially if it has little remaining depreciable life
- Real estate
- Closely-held securities without transfer restrictions
Not all assets are ideal candidates for placement in a community property trust. For instance, tax-deferred retirement accounts and closely-held securities that are subject to a transfer restriction agreement probably ought to remain outside of a community property trust. If you have questions about whether your assets are well-suited to this type of trust, speak to an experienced estate planning attorney.
Learn Whether this Type of Trust is Right for You
A community property trust offers tax and estate planning opportunities, but it should be considered only in light of your overall estate planning goals. To learn more about whether this type of trust is best for you, and for a comprehensive analysis of your situation and needs, please contact Gudorf Law Group to schedule a consultation.
