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SECTION 1014 AND UNDERSTANDING THE TAX NATURE OF CERTAIN ASSETS – Part II

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SECTION 1014 AND UNDERSTANDING THE TAX NATURE OF CERTAIN ASSETS – Part II

Community Property and Elective/Consensual Community Property

As mentioned in part one of this series of posts, the Code provides a special rule for community property.  section 1014(b)(6) of the Code provides that “property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, or possession of the United States or any foreign country, if at least one-half of the whole of the community interest in such property was includible in determining the value of the decedent’s gross estate”[1] shall be deemed to have been acquired from or to have passed from the decedent.

There are currently nine community property states.: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin.  There are two states that are separate property states but they allow couples to convert or elect to treat their property as community property: Alaska[2] and Tennessee.[3]  Generally, these elective or “consensual community property” laws allow resident and nonresident couples to classify property as community property by transferring the property to a qualifying trust.  Generally, for nonresidents, a qualifying trust requires at least one trustee who is a resident of the state or a company authorized to act as a fiduciary of such state, and specific language declaring the trust asset as community property.

Clearly, for residents of separate property states, taking advantage of the “consensual community property” laws of another state has the potential for a basis adjustment under section 1014(b)(6) of the Code.  There has been no direct ruling on whether that would be the case under the laws of Alaska or Tennessee.  However, a number of commentators have argued that assets in such “consensual community property” arrangements would, indeed, receive a full “step-up” in basis under section 1014(b)(6) of the Code.[4]  A professional fiduciary must be designated in Alaska or Tennessee in order to invoke the respective statutes and the administrative expense ought be weighed against the potential benefit, taking into consideration the uncertainty.

Turney P. Berry

Louisville, Kentucky

[1] § 1014(b)(6).

[2] Alaska Stat. 34.77.010 et al.  (Alaska Community Property Act).

[3] Tenn. Code Ann. § 35-17-101 et al. (Tennessee Community Property Trust Act of 2010).

[4] Jonathan G. Blattmachr and Howard M. Zaritsky, Alaska Consensual Community Property Law and Property Trust, __ Trusts & Estates 65 (Nov. 1998), Jonathan G. Blattmachr, Howard M. Zaritsky and Mark L. Ascher. Tax Planning with Consensual Community Property: Alaska’s New Community Property Law, 33 Real Prop. Probate and Tr. J. 615 (Winter 1999).

Leave a reply. Please note that although this blog may be helpful in informing clients and others who have an interest in information privacy and security, it is not intended to be legal advice. The information on this blog also should not be relied upon to form an attorney-client relationship.

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