Article on The Tennessee Community Property Trust Act of 2010

J. Paul Singleton (Associate, Manier & Herod, PC) recently published his article entitled, Yes, Virginia, Tax Loopholes Still Exist: An Examination of the Tennessee Community Property Trust Act of 2010, 42 U. Mem. L. Rev. 369 (2011). The introduction from the article is below: 

What has been called by some “[o]ne of the most widely used tax loopholes” and by others as the “last great tax shelter,”section 1014 of the Internal Revenue Code generally permits a recipient of inherited property to treat the basis of such property as the fair market value at the decedent’s date of death. This is referred to as receiving a “step-up” in basis. The effect of this provision is to allow a significant amount of appreciated property to wholly escape federal income taxation. Although this provision applies to taxpayers in every state, individuals living in community property states receive a double dose of this already exceptional tax benefit.

Due to a quirk in the income tax laws, in community property states, property owned by a decedent’s spouse will also be entitled to receive this step-up at the death of the decedent. This double step-up in basis permits couples in community property states to completely eliminate a significant amount of potential gains on appreciated property. To capture this beneficial income tax treatment afforded to community property residents, some state legislatures have attempted to create elective versions of community property systems, while retaining traditional forms of property ownership for non-electing citizens. By redefining state property rights, citizens in non-community property states may be able to take advantage of loopholes otherwise afforded only to citizens of community property states without being forced to physically relocate to such jurisdictions.