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Charleston Estate Planning & Asset Protection Blog

Tuesday, April 17, 2018

What Are the Advantages of a Community Property Trust?

When it comes to estate planning, it is common to hear people tell you “you’ve got to have a trust!” While this may be true, what is missing from this statement is the fact that there are many different kinds of trusts available. Some people make the mistake of running out and obtaining a do-it-yourself-trust that offers little or no protection for their situation. In many cases, a community property trust may be the best option for you and your family. Only a community property trust lawyer will be able to make this determination.

What is a Community Property Trust?

To understand the importance of community property when viewing the matter from an estate law perspective, it helps to understand the purpose of a community property trust. The main benefit of a community property trust is the reduction or elimination of capital gains taxes after death.

A community property trust is a special type of revocable trust for spouses who own low-basis assets. By using a community property trust, the couple can take advantage of the double step-up basis for inheritance. Currently, only Tennessee and Alaska allow for the formation of community property trusts. However, the laws are written in a way that permits residents in South Carolina to take advantage of the benefits of a community property trust.

How Can a Community Property Trust Benefit Me?

Before we can discuss the benefits of the double step-up basis, it is important to understand capital gains. Capital gains tax is based on the difference between what you paid for an asset and the later sales price of that asset. However, for inherited property, there is a different rule. The “step-up” rule states that inherited property is valued based on the date of the owner’s death. Therefore, instead of receiving a home valued at $60,000 (the original purchase price), you inherit a home valued at $300,000 (the value at the time of the decedent’s death).

If you had to pay capital gains tax based on the original purchase price, you could owe thousands of dollars. With the step-up rule, your basis for calculating capital gains tax would be $300,000 instead of $60,000.

Because South Carolina is an equitable property or separate property state, a spouse is only able to apply the step-up rule to one-half of the appreciated value of the jointly owned property — the half the spouse owned at the time of death. However, by using a community property trust, couples can take advantage of the same benefits as couples who live in community property states.

But I Live in South Carolina Which is Not a Community Property State!

As discussed above, Alaska and Tennessee have enacted laws that allow their residents, and residents of other states, to “opt in” to the community property system by creating a community property trust. Property is transferred to the trust and is treated as community property.

Therefore, when a spouse dies, the surviving spouse receives a “double” step-up basis for calculating the value of the property. In other words, the entire value of the property is “stepped up” instead of only the one-half interest owned by the deceased spouse. By using this technique, the surviving spouse can significantly reduce or eliminate capital gains taxes.

Consulting a South Carolina Wills and Trusts Attorney

Using this strategy can work very well for some couples, under the right circumstances. However, there could be disadvantages in using a community property trust. You should always consult an experienced wills and trusts attorney to discuss your estate planning options to determine the best options for you and your family. Schedule a consult with one of our South Carolina community property trust lawyers today to ensure your estate is secure.

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Wiles Law Firm, LLC helps clients with their estate planning needs in Charleston, South Carolina and the surrounding areas such as West Ashley, Summerville, North Charleston, Mount Pleasant, and John's Island.

Information on this website is not legal advice. Further, viewing of the enclosed information does not create an attorney-client relationship with Wiles Law Firm, LLC. Matters will be handled by attorneys who primarily practice out of our office in Charleston County located at 852 Lowcountry Blvd., Ste. 101, Mt. Pleasant, SC 29464. M. Emerson Wiles, III is the attorney responsible for this advertisement.

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