​Kentucky’s New Forward Thinking Estate Planning Tool - Community Property Trust Act

On July 15, 2020 Kentucky joined a small group of forward-thinking states by enacting a powerful tax planning tool, known as a Community Property Trust. Kentucky is only the fourth state in the union, to allow a married couple to opt in to the “community property” regime, joining other tax-advantaged and estate planning proactive states, Alaska, South Dakota and Tennessee. 

Community Property Trusts receive favorable tax treatment by allowing all trust assets to receive a 100% “step-up” in basis for federal tax purposes at the death of the first spouse. This is significantly different from the traditional planning/"separate property" system, where at the first death, only 50% of the marital assets will receive a step up in basis.

A 100% basis adjustment is not only extremely valuable for transfer tax purposes (i.e. capital gains tax), it also increases the depreciable basis for some business assets providing additional income tax benefits. 

Kentucky’s new Community Property Trust Act also creates planning opportunities for non-Kentucky residents, thereby bringing additional assets to the state.  Facts are that most states are governed by “separate property” laws. If a resident of a “separate property” state has or develops close ties with Kentucky, they can also avail themselves of the benefits provided by a Kentucky Community Property Trust.

To implement a Community Property Trust, a married couple must establish a joint revocable trust and at least one trustee must be an individual who is a Kentucky resident or a bank/trust company authorized to act in the Commonwealth of Kentucky.  Community Property Trusts can change the dynamics of property division if the couple divorces, and such circumstance should be specifically addressed in the trust.  

Further, an obligation incurred by one spouse prior to or during the marriage may be satisfied only from that spouse’s one-half share of a Community Property Trust.

Kentucky's new Community Property Trust Act gives significant estate planning and income tax planning opportunities.  Those who will benefit the most from this Act are couples with stable marriages and significant appreciated property. 

Kentucky’s Community Property Trust Act is codified at KRS 386.620.