Alaska Community Property Trusts
ALASKA'S OPTIONAL COMMUNITY PROPERTY SYSTEM AND COMMUNITY PROPERTY TRUSTS FOR USE BY RESIDENTS AND NON-RESIDENTS OF ALASKA
New Alaska Community Property System. The 1998 Alaska legislature enacted a community property system (The Alaska Community Property Act) based in part on the Uniform Marital Property Act. To participate in this community property system, couples must "elect in," partially or completely. For example, a couple may elect to have only certain assets characterized as Alaska community property.
Why Would You Want To Form An Alaska Community Property Trust? There are two types of benefits which an Alaska community property trust would provide. First, community property is a property ownership system which generally provides for equal ownership of property by husband and wife. Usually, there is a sharing in the appreciation and income from the property. Similarly, there is often an equal sharing in the management of the property. Many couples find this equality and sharing arrangement the preferred form of property ownership.
From an income tax standpoint, community property is presently given a significant tax advantage. At the death of the first spouse to die, both spouse's interests in the community property receive a full basis adjustment. As a result, there will be no capital gain payable if the property is sold for its value at the date of the first spouse's death. Further, the increased basis will allow for increased depreciation deductions for business and investment depreciable property. In a separate property state, if the property was jointly owned between husband and wife, only one-half of the property would receive such an adjustment in basis.
Such a full basis adjustment is often very desirable. After one spouse dies, it may be necessary for the surviving spouse to sell certain assets. The family business may need to be sold due to the decedent's lack of participation, or pursuant to an existing buy-sell agreement. Real property may be considered burdensome to manage. Market conditions may dictate the sale of assets before an expected downturn. Assets may need to be sold to replace the decedent's earnings. If a full basis adjustment has been obtained, capital gain taxes will be eliminated or greatly reduced.
The use of an optional community property system to obtain a full basis step-up is a new development in the tax law. We are not sure if the IRS will attempt to challenge it, absent new legislation. Alaska has a strong tax law position. This is probably why the Treasury Department has proposed new legislation eliminating the full basis adjustment. However, we anticipate vigorous opposition from community property states. Also, a more persuasive position is that Congress should extend the full basis adjustment to all spousal jointly held property.
Who Should Consider Using A Community Property Trust? Couples who have a stable marriage and are attracted to the equality of the shared ownership characteristics of community property. Further, couples who have a significant amount of appreciated property, and desire the income tax advantages discussed above.
How Do You Form A Community Property Trust? Many couples have already accomplished significant estate planning. They may each have existing revocable trusts, or sophisticated wills. In this situation, a community property trust can be added to this existing estate planning. Appreciated property which is presently held in their other revocable trusts or by the spouses individually would be transferred into a new community property trust. At the death of the first spouse, when the allowable basis adjustment occurs, then the community property would be divided. One-half would be distributed to the deceased spouse's revocable trust or estate, and the other one-half would be distributed to the surviving spouse's revocable trust or outright to such spouse. If a couple had not yet accomplished estate planning, then a new joint revocable trust could be formed that would hold their community property, the husband's separate property, and the wife's separate property.
Non-Residents. The Alaska Community Property Act allows nonresidents of Alaska to form Alaska community property trusts. However, such trusts require an Alaska qualified trustee. Such a trustee must be an individual domiciled in Alaska or an Alaska trust company or bank. Other co-trustees may be nonresidents and may include the spouses. The Alaska trustee's powers must include maintaining records for the trust on an exclusive or non-exclusive basis, and preparing and arranging for the preparation of any income tax returns that must be filed by the trust, again on an exclusive or non-exclusive basis.
Our articles page contains several thorough articles discussing this subject in depth. Our office is available to discuss the use of Alaska's optional community property system for your estate planning.
SHAFTEL LAW OFFICES, P.C.
1029 West Third Avenue, Suite 600
Anchorage, Alaska 99501
FAX: (907) 278‐6015