Community Property Trust

Kentucky’s new Community Property Trust Act went into effect on July 15, 2020, which allows the creation of a “Community Property Trust” (a “CPT”), between spouses. Before the passage of this Act, only nine (9) states recognized community property between spouses, and the tax benefits that recognition brings. Now, you can join couples in those nine states and create a CPT (or amend your current revocable living trust) and the assets held in the trust can be considered “community property” allowing for a full basis “step up” regardless of which spouse passes first.

Generally, when one spouse passes away, the other spouse has to retain any assets jointly owned until the surviving spouse’s death to avoid paying taxes on selling that asset. This may pose a problem for some surviving spouses who would want to or need to sell jointly held assets like stock or a house, after a death. Until this year, in Kentucky, spouses were unable to avoid paying that tax. However, with the passage of this Act, and the creation of a CPT, we can help you avoid paying that capital gains tax on specific assets titled in your new Community Property Trust.

What this means, by way of example, when you sell an asset, like real estate, you pay tax on the difference between the selling price and your basis.  Your basis is typically the price you paid when you purchased the asset.  For example, if you bought real estate for $100,000.00 but sell it for $350,000.00, you will pay capital gains tax on the $250,000.00 gain.

When you pass away, your heirs (e.g., surviving spouse or children) get a step up in basis on assets included in your gross taxable estate.  Meaning, if that same real estate is included in your estate, the basis in the real estate for your heirs would be $350,000.00 and they could sell the real estate tax-free. The significance of this change cannot be overstated.

Unfortunately, if that house is titled in survivorship with a spouse, it will not get a full step up in basis at the first spouses death.  If the surviving spouse then sells the real estate, they will still owe tax on the sale.  An exception to this rule is if the asset is  considered  “community property”.  In that case, the surviving spouse will get a full basis step up and can sell the real estate tax-free.

Kentucky’s recent adoption of the Kentucky Community Trust Property Act, presents a potentially valuable planning opportunity that can save significant taxes for a surviving spouse, after one spouse passes away. These opportunities will require revisions to your current documents or creating an entirely new community property state in compliance with Kentucky law. Read more about how the new law may affect you by visiting the Community Property Trust PagePlease call me at (502) 814-9860 to discuss how we can take advantage of this important change in the law.