Community Property Trust

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Den111
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Joined: Wed Apr 21, 2021 7:35 am

Community Property Trust

Post by Den111 »

I don't understand community property trusts. I am in a common law state and have a very standard living trust but am trying to figure out if we need a community property trust for some or all of our assets. What are advantages and disadvantages of a community property trust for a married couple where all assets were acquired together during the marriage and include appreciated rental property, appreciated residence, appreciated brokerage accounts with all three asset types held jointly in family living trust. In addition each spouse has IRA's with spouse as primary beneficiary. Currently at first death 1/2 estate stays in survivor revocable trust and 1/2 goes into irrevocable trust for survivor with 4 to 5 % annual payout to survivor with a trust for each child as beneficiary. At second death assets split into trust for each child.

Does the community property trust effect or complicate the IRA stretch options for the children and or any basis step up advantages for the children.

When I read about it I can see where the supposed step up advantage seems beneficial . But.. If that is the case, why doesn't everyone in a common law state that has a living trust convert to a community property trust.
thanks
Last edited by Den111 on Thu Jul 08, 2021 7:56 am, edited 1 time in total.
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Lee_WSP
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Re: Community Property Trust

Post by Lee_WSP »

First, it looks like you'd have to form the trust in Alaska or Tennessee. As such, you're probably going to create more problems than solutions.

Community property does not affect inheriting an IRA as an IRA or any retirement account has no cost basis. It only affects the step up in cost basis.
bsteiner
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Re: Community Property Trust

Post by bsteiner »

Den111 wrote: Fri May 14, 2021 7:56 am I don't understand community property trusts. I am in a common law state and have a very standard living trust but am trying to figure out if we need a community property trust for some or all of our assets. What are advantages and disadvantages of a community property trust for a married couple where all assets were acquired together during the marriage and include appreciated rental property, appreciated residence, appreciated brokerage accounts with all three asset types held jointly in family living trust. In addition each spouse has IRA's with spouse as primary beneficiary. Currently at first death 1/2 estate stays in survivor revocable trust and 1/2 goes into irrevocable trust for survivor with 4 to 5 % annual payout to survivor with a trust for each child as beneficiary. At second death assets split into trust for each child.
...
If it works, it would allow a couple in a common law state to have a single revocable trust for both spouses, as is common in California, and it would allow for a full basis step-up at the first spouse's death. A single revocable trust comes closest to joint ownership, which is what many couples would otherwise have.
Den111 wrote: Fri May 14, 2021 7:56 am ...
Does the community property trust affect or complicate the IRA stretch options for the children and or any basis step up advantages for the children.
...
If you were to leave your IRA to such a trust, and if it worked, and if it allows for non pro rata division between the spouses, it would allow the IRA to be allocated to the surviving spouse as part of his/her half, and other assets to be allocated to the deceased spouse's half. However, it might necessitate a private letter ruling for the surviving spouse to accomplish a rollover.

If it works, it would allow a full basis step-up at the first death for the nonretirement assets.
Den111 wrote: Fri May 14, 2021 7:56 am ...
When I read about it I can see where the supposed step up advantage seems beneficial. But if that is the case, why doesn't everyone in a common law state that has a living trust convert to a common law trust.
First, most people in common law states don't have revocable trusts. They're appropriate in some cases, and in some states where probating a Will or dealing with the probate court is difficult (notably California) or expensive (the court filing fee in Delaware in 1.75% of the probate assets other than real estate), but not for most people in most states.

Second, if you don't have an individual in Alaska or Tennessee willing to act as trustee at little or no cost, you'll have to pay a trust company a few thousand dollars a year to serve as trustee, in addition to the cost of creating the trust. While joint revocable trusts are common in California, lawyers in common law states generally aren't familiar with them, so it would require additional effort.

Third, there's some question as to whether this works for people who don't live in a state that recognizes this.
Topic Author
Den111
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Joined: Wed Apr 21, 2021 7:35 am

Re: Community Property Trust

Post by Den111 »

Four common law states now have community property trusts and we will very soon be a resident of one of the four.
Question :
1)Regarding step up in basis,, I understand there is a full step-up when first spouse passes. Is there also still an additional (ie second) full basis step-up when second spouse passes and the assets move from the revocable A trust and irrevocable B trust into the two children's irrevocable trusts ?

2)May I safely assume that the location of the corporate or individual trustee that only takes over after second to die can be in any state ?

3) Currently wife and I are co trustees of our living trust and at first to die the survivor will be sole trustee of the revocable and the irrevocable trust.
Is that still possible with the community property set-up? I very much assume it is but just checking.


Thanks
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Lee_WSP
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Re: Community Property Trust

Post by Lee_WSP »

There is no difference in step up after the second to die. The children or other heir receive the full step up.
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