Community property states such as California and Texas, permit assets to receive a step-up in basis to the current fair market value at the death of the first spouse to die regardless of which spouse owns the assets. Tennessee is a separate property state (and not a community property state) so that only the separate assets of the deceased spouse (titled in his or her name) or one-half of any jointly-owned property are entitled to a step-up in basis to the current fair market value at the death of the first spouse to die.
However, the Tennessee Community Property Act of 2010 was enacted and allows for community property ownership of assets in a Tennessee Community Property Trust. Although community property ownership of assets between a husband and wife is not always beneficial, it can provide significant advantage in the right circumstances, especially for property with a very low tax basis.
Provided the Community Property Trust meets certain requirements, the property owned by the trust will be treated as community property. The most significant advantage of community property ownership is that both spouses’ interests receive a step-up in basis up to the fair market value of the property upon the death of the first spouse to die. In contrast, if the property was owned jointly or owned as tenants by the entireties, only half of the property would receive a step-up in basis at the first death. Thus, community property ownership can significantly reduce or even eliminate capital gains upon the death of a spouse.
If you are interested in learning more about the Tennessee Community Property Trust, please contact our office to schedule an appointment.
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