Episode summary
Benefits and Risks of Community Property Opt-In Trusts
Summary
The discussion explains how community property opt-in trusts are used to preserve a full step-up in basis for appreciated assets when one spouse dies, potentially reducing capital gains taxes for the surviving spouse. The guest contrasts common law states, where spouses generally own property separately, with community property states, where assets are treated more like a 50/50 marital pool for tax purposes.
The guest says the tax benefit is especially important when a couple owns highly appreciated assets such as real estate or marketable securities. In the common law example, only the deceased spouse’s half gets a basis step-up, leaving the survivor with some built-in gain. In a community property setup, the entire asset can receive a new basis at death, which can eliminate later taxable gain if the survivor sells.
The guest also notes that only five states—Alaska, Florida, Kentucky, South Dakota, and Tennessee—have opt-in trust regimes, and the rules vary. Key requirements include an express declaration that the trust property is community property, both spouses signing, and, in most cases, a corporate or in-state trustee. The strategy is not useful for IRAs, 401(k)s, or life insurance, and the guest says it is best suited to certain higher-net-worth households rather than everyone.
Key takeaways
- The guest says community property opt-in trusts can create a full step-up in basis at the first spouse’s death, reducing capital gains for the survivor.
- The guest says common law states usually give only a partial basis step-up, while community property treatment can step up the whole asset.
- The guest says five states offer opt-in trust statutes: Alaska, Florida, Kentucky, South Dakota, and Tennessee.
- The guest says the trust generally must expressly state the property is community property and require both spouses to sign.
- The guest says the strategy usually does not help with IRAs, 401(k)s, or life insurance, and it is not right for every client.
Notable quotes
“In community property states, we really treat things a bit different that between spouses, it's kind of 50/50 and we just split it up that way”
“this is a powerful planning vehicle to reduce down some of these taxes, especially for that surviving spouse”
“right now we have uh five states really that have created these community property optin trusts”
“The first one is an express declaration in the trust document that the property that's being funded in there is treated as community property”
“most of your assets really could go in here that are going to uh have, you know, step up in basis capabilities”
How the episode opens
Hi, I'm Susan Lip, editor and chief of Trust and Estates, and I'm speaking with Jamie Hopkins, CEO of Binmar Trust Adviserss LLC and chief wealth officer at Binmar Trust. Today, we're discussing community property opt-in trusts based on an article that was written by Craig Hers in the May issue of trust and estates. So just for a little background, some common law states enact statutes that allow spouses to elect community property treatment through a trust structure.
And doing that helps reduce capital gains because community property states treat the surviving spouse's one half interest in community property as having been acquired from the deedent provided that at least one half of the whole is included in the deedent's gross estate. permitting a full fair market value basis adjustment at the first step. We're going to get into that a little bit more.
Jaime's going to discuss some aspects of that, but first to start us off, just Jamie, if you could explain common law versus community property.
Yeah. Well, that was a great intro. So, I think we we got a lot there.
I think we got some of the code section in there that determines it, too. So, one of the starting points this whole conversation, great article. Uh so if you if you have a couple minutes write and uh go check out the article, but uh it really starts off with common law states versus community property states.
Most people and most of our states in the US are common law states, meaning like you own something, you own it. In community property states, we really treat things a bit different that between spouses, it's kind of 50/50 and we just split it up that way. Um remember though uh I when I when I used to teach this in the CFP uh curriculum I always tried to go back to this point ownership is different than divorce.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- community property opt-in trusts
- common law vs community property states
- tax basis
- state requirements
- trust risks
Companies and tickers mentioned
- Bryn Mawr Trust
Watch the episode
Watch “Benefits and Risks of Community Property Opt-In Trusts” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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