COST BASIS
Cost basis is the original value or purchase price of an asset or investment for tax purposes. The cost basis value is used in the calculation of capital gains or losses, which is the difference between the selling price and purchase price of the asset or investment.
CAPITAL GAINS
Capital gains are increases in the value of assets. Capital gains can be either realized or unrealized. Realized capital gains are gains realized when the asset is sold. Unrealized capital gains are gains not yet realized since the asset has not been sold.
CAPITAL GAINS TAX
A capital gains tax is a tax on the capital gain of an assets when the asset is sold. The seller pays the capital gains tax.
STEP-UP IN COST BASIS
A step-up in basis is the readjustment of the value of an appreciated asset for tax purposes upon inheritance. The fair market value of the asset at the time of inheritance is considered as the new cost basis of the asset for tax purposes, rather than the original cost of the asset. A step-up in basis is applied to the cost basis of an asset transferred at death, if the fair market value at death is greater than the original cost basis.
COMMUNITY PROPERTY
Community property is comprised of assets which are acquired during a couple’s marriage through any means other than inheritance or gift. Assets acquired by the married couple, regardless of how those assets are titled, are viewed as assets of the marital community. Not all states recognize community property.
The primary tax benefit of community property owned by a married couple is that, upon the first spouse’s death, both spouses’ ownership in the community property receives a step-up in capital gains tax basis to the fair market value of the property. If the surviving spouse subsequently sells the community property for such value or less, then the surviving spouse pays no tax on the capital gains.
TENNESSEE COMMUNITY PROPERTY TRUST
Tennessee is not a community property state. However, in 2010, Tennessee enacted the Tennessee Community Property Trust (TCPT) Act which allows married couples to convert their marital and/or separate property to community property by transferring their assets to a TCPT. Tennessee residents, or residents of other non-community property states, can opt to receive the benefits of community property without residing in a community property state by forming and funding a TCPT.
ADVANTAGES & DISADVANTAGES TCPT
TCPT ADVANTAGES
- The primary advantage of the TCPT is the step-up in capital gains tax basis for appreciated assets. This advantage can result in significant tax savings to the surviving spouse and to the children of the married couple.
- A secondary advantage of a TCPT is the avoidance of, or reduction in, the cost and time delay of probate. Any assets held by the TCPT will pass upon death without the necessity of the Probate court process.
TCPT DISADVANTAGES
A TCPT does have some disadvantages.
- First, if a married couple owns property as tenants by the entirety, thereby enjoying asset protection of the asset due to such ownership, then converting tenancy by the entirety property to community property may subject the property to creditor claims against either spouse.
- Second, a TCPT could impact the division of assets in the event of a divorce. The statute even requires the trust document itself to include a disclaimer IN ALL CAPS to this effect.
- Third, a Tennessee resident or Tennessee chartered financial institution must serve as trustee while both spouses are living. However, if one or both of the spouses are Tennessee residents, then the Tennessee resident spouse may serve as trustee. In this case, both of you are Tennessee residents.
- Fourth, the TCPT is a joint trust between both spouses and only provides the tax benefits to property in the trust. For example, if a spouse owns property that cannot be transferred to the TCPT due to transfer restrictions on the asset, then that property cannot be transferred to the TCPT.
- Fifth, the TCPT provides tax benefits to appreciated assets. If the assets do not appreciate in value, then there is no benefit from the TCPT.
CONVERSION OF EXISTING TRUST
In addition to establishing a new TCPT, an existing revocable, grantor or “living” trust can be converted from a generic revocable trust to a TCPT.
TCPT IDEAL CANDIDATE
The ideal candidate for creating a TCPT is a married couple who has a successful, extended marriage, and who has assets which are appreciating in value over time.
WHO SHOULD I ENGAGE TO ASSIST ME WITH A COMMUNITY PROPERTY TRUST?
An Estate Planning Attorney with experience in representing executors, administrators, beneficiaries and creditors should be engaged to represent you in a probate proceeding.