Dear Mr. Premack: My wife and I own several pieces of real estate
worth several million. If we convert each to community property, and put
these properties into a joint trust, is the estate of each based on the
total value of the trust (without regard to the individual properties) or
does our estate valuation continue to be based on the individual
properties? – CMU
Your potential plan is to 1) convert the land
into community property, and 2) put the land into a joint trust, so that
3) you might be able to control the valuation of the land. I assume you
want to control the valuation in order to reduce or eliminate estate taxes
when one or both of you die. Before you carry out any part of this plan,
let’s look at each facet.
First, you want to convert the land to
community property (which means you think it is currently separate
property). Under Texas law, for it to be separate property one of you
would have (a) had to own it before your marriage began, (b) had to
inherit it or receive it by gift, or (c) you may have purchased it using
funds that were already your separate property. If it fits any of those
categories, it is separate property, and all the value of the land is
included only in the estate of the person who owns that separate property.
Converting it to community property would then have two advantages:
(a) the value of the land would be split equally between your two estates
– so if one of you dies, the IRS will only look at half the value as part
of your estate, and (b) community property gets a free step-up in basis
when one of you dies, which reduces the future capital gain taxes if the
surviving spouse sells the land.
Second, you want to put the land
into a joint trust. Doing so would place legal title into the hands of the
Trustees, and beneficial title into the hands of the beneficiaries of your
new trust. Typically, this type of trust would be revocable while you are
both still alive.
Third, you want to know if the trust itself is
valued as a unit or if the individual items within the trust are
separately valued. The answer is that the individual items with the trust
are still given discrete valuations. Putting them into a joint trust does
not create a separate entity which can be valued independently. If you
were to create a “family limited partnership” you might be allowed the
kind of lumped-together valuation that you desire, but the IRS almost
always challenges those partnership valuations (so be wary of using them).
My assumption is that you are asking these questions because you
want to avoid estate taxes. If so, you need to know that the new federal
estate tax law, which may expire in 2012, provides an exemption of $5
million per individual, or $10 million per married couple. If the land you
own is valued at $3 or $4 million, then it is entirely exempt from estate
tax if you die in 2011 or 2012. After those years, there is no way to
predict the tax exemption until Congress passes another law.
possible alternate plan: proceed with converting the land to community
property, and have an experienced elder law attorney draw up a joint
revocable living trust. But inside that trust, create a provision that
would transfer the ½ of the land owned by the first to die into an
irrevocable trust for the surviving spouse. If done correctly, that ½ will
pass tax-free at the first death (up to whatever amount Congress then
allows as an exemption).
The survivor’s estate would then NOT
include the value placed into that irrevocable trust, so when the survivor
eventually dies there will be no estate tax on that portion. Additionally,
the second-to-die will have whatever exemption is allowed by Congress.
This allows your land to pass to your heirs with the bare minimum in
estate taxation while preserving it for your enjoyment during your