Trusts are a great way to protect your assets later in life. But what about converting your property to the ownership of the community?
In 2010, Tennessee joined a few other states in the creation of community property trusts.
What is a Community Property Trust?
In essence, the Tennessee Community Property Trust Act of 2010 permits married couples to convert their jointly-owned property to community property by transferring it to a Tennessee community property trust. A couple can do this to all or some of their assets.
There are benefits in opting for a community property trust. The most notable advantage being that when the first spouse dies (after 2010), both spouses’ interests in the community property, not just the decedent’s interest, receive a step-up in basis for income tax purposes, up to the fair market value price. In this way, the living spouse may pay little to no taxes or could sell tax-free, depending on the set up of the trust.
There are also gift and estate tax benefits, too. A sizable asset to this type of trust is that it allows the couple to utilize their death tax exemptions. By doing so, when one spouse dies, his or her half is passed on by a will and the living spouse’s half becomes his or her property outright.
This also plays into another benefit: because each spouse owns an undivided one-half interest in all community property, each half may be eligible for a discount in value for transfer tax purposes.
Though the benefits are great, spouses need to read the fine print to ensure that if death occurs, the trust does not have a fine line benefiting one over the other.
Requirements for a Community Property Trust
To create a Tennessee Community Property Trust, there are four requirements as explained by the Tennessee Bar Association:
- “a declaration that it is such;
- at least one “qualified trustee,” meaning a Tennessee resident or bank qualified in Tennessee;
- signatures of both spouses; and
- specific “warning” language in capital letters at the beginning of the trust instrument.”
Disadvantages of a Community Property Trust
While there are few drawbacks to a community property trust, there are potential risks.
- As mentioned above, if a divorce occurs, the way assets are distributed can change.
- A Tennessee resident or financial institution in the state is required to serve as a Trustee while both spouses are alive.
- Property may be subject to creditor claims against either spouse.
Are you planning for the future and looking for ways to protect your assets and your spouse if you were to pass away? Let the Nashville trust attorneys at MHPS guide you.
Estate planning can be difficult. Let the estate planning lawyers at MHPS assist you in all your estate needs. Call us to learn more!