Kentucky Community Property Trust Act Provides Significant Basis Planning Opportunities for Married CouplesJuly 22, 2020 – Legal Alerts
On July 15, 2020, the Kentucky Community Property Trust Act (the “Act”; codified at KRS 386.620 et seq.) became effective, instituting an elective community property regime under Kentucky law. The intent of the Act is to permit spouses to receive a stepped-up basis for federal income tax purposes at the death of the first spouse in 100 percent of the property they have elected to treat as community property. This treatment is in stark contrast to the treatment of jointly held assets, wherein only 50 percent of the joint assets receive a stepped-up basis on the death of the first spouse.
While most U.S. states are governed under a separate property regime, nine U.S. states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin) are subject to community property laws. In a community property jurisdiction, absent an agreement to the contrary, each spouse is treated as the one-half owner of all property acquired during the marriage. In Alaska, South Dakota, and Tennessee, spouses may opt in to a community property regime and/or designate specific assets as community property. With the passage of the Act, Kentucky becomes the fourth state to permit an opt-in community property arrangement.
The Act provides that spouses wishing to avail themselves of community property treatment must contribute the assets to a community property trust created by both spouses. The trust must reflect the spouses’ intent to treat the property contributed to the trust as community property, and at least one trustee must be an individual who is a Kentucky resident or a bank or trust company authorized to act as a trustee in Kentucky. The Act also provides that, upon the dissolution of the marriage, one-half of the community property trust is distributed to each spouse absent an agreement to the contrary. An obligation incurred by only one spouse before or during marriage may be satisfied only from that spouse's one-half share of a community property trust.
Passage of the Act provides significant estate and income tax planning opportunities for Kentucky residents and non-residents who may have close contacts in the state. Spouses who own low-basis assets may elect to opt in to community property treatment with respect to these assets. On the death of the first spouse, 100 percent of each asset as to which community property treatment is elected will receive a stepped-up basis for federal income tax purposes, even though only one-half of the value of each asset will be includible in the deceased spouse’s estate for estate tax purposes. This treatment is markedly different from jointly held assets in non-community property jurisdictions, wherein only the decedent’s one-half interest in the asset receives a stepped-up basis for federal income tax purposes at his or her death.
Although many married couples may benefit from increased estate planning opportunities afforded under the Act, those in particular who will benefit are couples in long-term marriages, those who own significant appreciated property, and those who own significant real property with little or no remaining depreciable life.
As the Act will affect each individual differently, we encourage you to contact your Dinsmore attorney to discuss your specific situation in detail to determine whether a Kentucky community property trust may be right for you.