Tennessee Joint Community Property Trust
One form of Revocable Living Trust available to Tennessee residents is a Tennessee Community Property Living Trust. Living Trusts are trust estates established by individuals (grantor) generally naming themselves as the trust manager (trustee) for their personal benefit as the beneficiary. In the case of a husband and wife, each spouse has historically been required to establish his/her own separate Living Trust. Often, these trusts were mirror images of each other. As a part of the estate planning process, assets often owned jointly by the spouses had to be divided for estate tax planning purposes.
Tennessee’s legislature adopted a statute which now allows for the establishment of a Joint Living Trust between spouses. Furthermore, it adopted what is referred to as community property law for the purpose of providing additional income tax benefits to the surviving spouse at the death of a spouse.
Unlike the typical Revocable Living Trust, a Tennessee Community Property Living Trust is a single trust established by both spouses. Most family assets are transferred to the trust. Each spouse is a grantor, and each spouse is a co-trustee. The trust can be revoked or modified, but modification requires the signature of both spouses. The trust can be revoked at any time by either spouse. Neither spouse gives up control. The trust operates under what we call a legal fiction. Each spouse is deemed to own an undivided one-half interest in each and every asset held in the name of the trust. No separate accounting is required to reflect which spouse owns which assets; both spouses own one half of all assets.
In the event of the death of a spouse, the trust is divided into two separate, but equal, shares. One share is referred to as the Survivor’s Trust. The second share is referred to as the Decedent’s Trust or Family Trust. Following the death of one spouse, a significant tax benefit is produced by reason of provisions in the federal income tax law. Under Section 1014 of the Internal Revenue Code, at the death of one spouse, all assets held as community property receive a new basis, which is often referred to as a stepped-up basis. Assets that were purchased many years ago and which have appreciated in value receive a new basis for federal income tax purposes.
For example, if a stock was purchased 20 years ago at $10 per share and if the stock is now selling at $50 per share, at the death of one spouse, the basis is adjusted to $50. The surviving spouse can then sell the stock at $50 with no capital gain or income tax costs.
The Joint Community Property Living Trust is generally also structured to avoid or minimize death taxes. Properly structured, a Joint Living Trust may avoid all federal estate tax for couples having an estate which does not exceed $11 million. Following the first death, the surviving spouse is free to continue to administer the Survivor’s Trust as he/she might desire. Following the first death, the surviving spouse is generally able to administer the Decedent’s Trust or Family Trust in much the same way, subject to certain limitations upon which the spouses have agreed during life. For instance, it is common to structure the Decedent’s Trust or Family Trust so that the surviving spouse cannot leave the assets to anyone other than the children or grandchildren. This protects half of the estate from claims of a subsequent spouse in the event of remarriage.
A properly drafted Joint Community Property Living Trust accomplishes the following:
- Court conservatorships are avoided in the event of the disability of a spouse.
- Probate is avoided at the death of each spouse if assets are properly owned by the trust.
- At the first death, all investible assets (to the exclusion of certain retirement related assets) receive a new basis for income tax purposes, thus eliminating or reducing income tax consequences on the subsequent sale of investible assets.
- The tax basis of the assets in the Survivor’s Trust are adjusted yet again at the death of the surviving spouse to their fair market value as of the second date of death.
- Federal estate taxes are minimized and, in many cases, eliminated.
These trusts typically work well for spouses who have been married for many years and who desire to hold their assets jointly. This trust is less attractive to later life marriages in which the clients desire to provide for a spouse for life, but intend for their separate assets to pass to their children by prior marriage. This trust is not for everyone, but when it fits within the plan, it results in an excellent estate planning vehicle for the family.