For those residing in California, one of the nine “Community Property” states, where you have the ability to completely eliminate capital gains tax on assets in a living trust-- twice, if you are married! This is the good news, however, the bad news is the triggering event itself that delivers a “full step-up in cost basis” which is a trustor’s death. This means that as soon as one completes the “funding” process of the their trust assets that are then properly titled in the trust are then positioned to receive the “step-up” upon death. This is compelling for those married, since the first step-up occurs on the death of the first spouse/trustor to die, meaning the surviving spouse/trustor could then sell any asset of the trust and pay no capital gains tax; This asset could be a primary residence, rental investment, gold, etc., regardless of how much it has increased in value since the date it was first acquired (*not the date of transfer into the trust or how long you have owned it). Those who are single get this result as well, but only once. Deferring back to the married couple example, if a surviving spouse opted not to sell an asset following the death of his or her spouse, the children would be entitled to a second step-up, meaning they could sell any highly appreciated asset and pay no capital gains tax.
This “double step-up in cost basis” is obtained by a document that can accompany one’s living trust..there are many names for it. Its purpose is to have all assets of the trust treated for tax purposes only, as if they had been titled as Community Property. By doing it this way, one can truly obtain the best of both worlds- when an asset is properly titled in one’s trust, it will be afforded the probate avoidance that the trust titling delivers, but when it is treated for tax purposes as if it had been titled as community property, it is eligible for the double step-up in basis that Community Property titling delivers.
Just as you were to lose all faith in California and move to Oregon (which ironically is not a Community Property State), you may want to reconsider. Just kidding, if you establish your estate plan here, you may be able to take this amazing tax advantage with you wherever you decide to move. Although tax planning is an integral component of estate planning, we recommend you confer with your tax preparer to verity that you can take this tax benefit with you wherever you go.
If you have any questions or would like additional information, please don’t hesitate to call (559) 389-5070, or email us at firstname.lastname@example.org.