Community Property Gets Full Step Up in Basis Even When Held in a Revocable Living Trust
A San Diego Estate Planning Attorney knows that you, like everyone, likes to save tax dollars whenever possible. So, great news: Community property gets full step up in basis even when held in a revocable living trust.
In other words, when the person who created the living trust (i.e. trust maker, settlor, trustor, or grantor) dies, the surviving spouse gets a step up in basis to the date of death fair market value.
If you live in a community property state such as California, there is a full step in basis of all community property at death.
Those in separate property states only receive a step up in basis as to ½ of any jointly owned property. So, if you own community property and move to a separate property state be sure to maintain your property as community property. The tax benefits are huge.
For example, Sam and Suzy Shaffer created a joint revocable living trust in our San Diego estate planning attorney office. The trust was funded with all of their property, including community property such as their stock investment account. They had a basis of $50,000 in underlying stocks.
In 2011, Sam dies while celebrating Cinco de Mayo in Old Town San Diego.
Suzy inherits all of the community property, including the stock account. On the day Sam died, the account was worth $200,000. So, Suzy received a full step up in basis to $200,000.
Immediately, she sells the stock to go on a around the world cruise. Suzy will owe no capital gains taxes on the stock sale because it was held as community property.
If Suzy had lived in a separate property state, she would have only received a half step up in basis. In other words, when Sam died, only his ½ share would have been stepped up to the date of death value.
This means that only one half of the property would have received a step up in basis (i.e. $100,000.) So, had Suzy sold the stock in a separate property state, she would have had to pay capital gains taxes on her share of the growth which is $75,000 ($200,000/2 = $100,000 – $50,000 basis/2 = $75,000.)
The long term capital gains rate is 15% in 2011. And, 15% of $75,000 is $11,250.
If you have questions about community property and estate planning, be sure to call our San Diego estate planning attorney law office. We look forward to hearing from you.