Tennessee Community Property Trust: Grant, Konvalinka & Harrison, P.C. share some insight

In 2010, the Tennessee legislature passed the Tennessee Community Property Trust Act. A Tennessee Community Property Trust is a trust that permits resident and nonresident married couples to convert jointly owned property to community property by transferring property by deed to a Community Property Trust. The trust is essentially a joint revocable trust for the husband and wife.

A Tennessee Community Property Trust allows for equal ownership of property by husband and wife, including a sharing in the appreciation and income from the property. Some of the benefits of a Community Property Trust are: (a) some couples may find the equality and sharing arrangement to be a preferred form of property ownership; (b) community property receives a significant capital gains tax advantage; (c) at the death of the first spouse, 100% of property owned by the trust receives a stepped up basis to fair market value at the date of death.

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In other words, when the first spouse dies, both spouses' interest in the community property, not just the decedent's interest, receive a step up in basis for income tax purposes, up to the fair market value price. For example, if husband and wife purchased stock 20 years ago for $250,000 and its worth $500,000 on the first spouses' death, then the surviving spouse will receive a cost basis of $500,000 for the entire property, not just on the half of the property which was owned by the decedent. By receiving a stepped-up basis on the entire property, the surviving spouse can sell the property after the fist spouses' death without paying capital gains on the appreciation in value.

The requirement for a Community Property Trust are as follows:

1. The Trust Agreement must state that it is a Community Property Trust.

2. The Trust Agreement must have at least one trustee who is a Tennessee resident or a Tennessee Bank or Trust Company.

3. The Trust Agreement must be signed by both spouses.

4. The Trust Agreement must contain the statutory warning that gives notice of the consequences of the trust.

If drafted correctly, a Tennessee Community Property Trust can be converted from a revocable trust to an irrevocable trust after the first spouse's death. Thus, adding significant creditor protection for the surviving spouse after the death of the first spouse.

Not every trust is right for everyone and the Tennessee Community Property Trust does have some disadvantages under certain circumstances. For example, upon divorce, the Trustee must distribute one-half of the trust assets to each spouse. In addition, an obligation incurred by one spouse may only be satisfied by the spouses' one-half share of the trust. However, an obligation incurred by both spouses may be satisfied from the entire trust. Finally, a Tennessee Community Property Trust has inferior creditor protection to tenancy by entirety ownership while both spouses are living.

It is important to reiterate that one does not have to be a resident of the State of Tennessee to take advantage of a Tennessee Community Property Trust. A resident of any state can create a Tennessee Community Property Trust if they have a Tennessee Trustee and the trust instrument meets the requirements outlined above. Given one's own personal circumstances, the significant tax savings may outweigh any of the disadvantages associated with the Tennessee Community Property Trust.

Grant, Konvalinka & Harrison, P.C., is located at Republic Centre, Ninth Floor 633 Chestnut Street and can be reached at 423-756-8400.

Noteworthy:

A Tennessee Community Property Trust allows for equal ownership of property by husband and wife, including a sharing in the appreciation and income from the property.

For more information:

Grant, Konvalinka & Harrison, P.C., is located at Republic Centre, Ninth Floor 633 Chestnut Street and can be reached at 423-756-8400.

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