Should Alaska Spouses Use a Community Property Trust?
If you are married and own appreciated property (or property that may appreciate in value) — a home, stock, a business, or rental real estate — an Alaska Community Property Trust could save your family a significant amount of capital gains tax when the first spouse dies. It is one of the most powerful planning tools Alaska offers. It is also widely misunderstood.
What is a Community Property Trust – The Short Answer
A Community Property Trust is an agreement between you and your spouse that converts property you own jointly or separately into community property under Alaska law. When one spouse dies, federal tax law allows a “step-up” in the cost basis of all community property — not just the deceased spouse’s half. That can wipe out capital gains that would otherwise be owed if the surviving spouse later sells the assets.
For many Alaska couples with appreciated (or that may appreciate in value) assets, that single tax benefit can be worth a lot.
What Is Cost Basis, and Why Does a Step-Up Matter?
Your cost basis in an asset is what you paid for it, adjusted over time. When you sell, you pay capital gains tax on the difference between the appreciated sale price and the basis.
Imagine you and your spouse bought rental property in 1998 for $150,000. Today it is worth $650,000. If you sold it tomorrow, you would owe capital gains tax on $500,000 of appreciation.
Now imagine one spouse dies. Under ordinary rules, only the deceased spouse’s half of the property gets a new basis equal to the fair market value on the date of their death. The surviving spouse’s interest keeps the original basis on the other half. If the surviving spouse sells, the gain on their half may incur a capital gains tax.
Community property works differently. Under Internal Revenue Code section 1014(b)(6), both spouses’ interest in community property receive a stepped-up basis at the first spouse’s death. In the example above, the entire $500,000 gain disappears for tax purposes. The surviving spouse can sell and owe no capital gain (if no other gain occurs before the sale).
Alaska Is One of the Few States That Lets You Opt In
Nine states — including California and Washington — are true community property states. Alaska is not one of them. However, Alaska has an opt-in community property law. In 1998 the Alaska legislature enacted the Alaska Community Property Act, which allows married couples to classify some or all of their property as community property by signing a Community Property Agreement or by placing assets into a Community Property Trust.
Tennessee and a handful of other states have followed Alaska’s lead. For many practitioners, Alaska’s statute remains the gold standard, and Alaska trust companies regularly serve non-Alaska couples who want the same tax benefit.
Who Is a Good Candidate?
A Community Property Trust makes sense when three conditions are met.
- You are married and plan to stay married. Divorce may complicate community property division.
- You own assets that have appreciated, or that may appreciate in value — a long-held home, a family business, stocks, or real estate.
- You and your spouse are comfortable with each half of the property being treated as jointly owned for purposes of the trust.
It is less useful if most of your wealth is in retirement accounts (IRAs and 401(k)s do not receive a basis step-up), if your assets have depreciated, or if you and your spouse have significantly asymmetric estate planning goals.
What Are the Risks?
A Community Property Trust is not free. There are real trade-offs.
First, community property is equally owned. In a divorce, the trust will factor into the property division. Spouses with pre-marital assets they want to keep separate need to think carefully before reclassifying them as community property.
Second, creditor protection is different. Community property is generally available to creditors of either spouse. If one spouse has significant professional liability exposure, you need to consider if you want to hold property jointly in a community property trust.
Third, the trust needs to be drafted correctly. Alaska law requires specific formalities. A poorly drafted agreement may fail to achieve community property treatment and may not qualify for the tax benefit.
Fourth, there is an administrative cost. Trust documents must be prepared, assets must be properly funded into the trust, and a qualified Alaska trustee is required for non-residents who want to use the Alaska community property laws.
How the Process Works
Implementing a Community Property Trust takes a little time.
- We begin with a conversation about your assets, your marriage, and your long-term goals.
- If the trust makes sense, we draft the trust agreement, and/or the community property agreement, and any supporting documents.
- We help you fund the trust — transfer title of the selected assets into the trust’s name.
- We give you a written document explaining how to transfer future assets into the trust.
Frequently Asked Questions
Do we have to put all of our property into the trust?
No. You decide which assets to include.
Can we undo a Community Property Trust?
Yes. Alaska law allows spouses to revoke or amend the trust agreement by mutual consent. However, reclassifying property out of community status may have tax consequences (you should consult an accountant).
Does a Community Property Trust avoid probate?
Assets properly titled in the trust avoid probate, like any other funded revocable trust.
What if we move out of Alaska?
The community property character of the assets generally travels with you, but the rules governing the trust may change. Review your plan whenever you change your state of residence.
Does this work if we already live in another state?
Yes. Non-Alaska couples can use an Alaska Community Property Trust if they appoint an Alaska trustee (private or Alaska-qualified trust company). Several Alaska trust companies serve out-of-state residents for exactly this purpose.
The Bottom Line
For married couples with appreciated assets (or that may appreciate in value), an Alaska Community Property Trust can be a valuable estate planning tool. It is not right for everyone. It is not a do-it-yourself project. Done correctly, it can save your family thousands of dollars in taxes. Done badly, it can create problems that outlive you.
If you are considering an Alaska Community Property Trust, we are glad to walk you through the process. Call us to schedule a consultation at: (907) 375-0750 or use the contact form to schedule a consultation.
This post is general information, not legal or tax advice. Every family’s situation is different. If you have questions about Alaska community property planning, consult an attorney.
