11/2/2026

Step Up Your Estate Plan With a Community Property Trust

Community property trusts have created a new opportunity for certain married couples with appreciated assets: access to favorable tax treatment that wasn’t previously available to them. That opportunity stems from a longstanding difference in how states treat marital property.

A Tax Advantage With Limited Reach

Historically, as married couples built wealth, from buying a home to growing an investment portfolio, how they owned those assets depended on where they lived. States generally follow one of two sets of rules:

Community property states treat assets gained during a marriage as equally owned by both spouses, no matter whose name is on the title.
Common law property states don’t automatically treat assets acquired during marriage as equally owned. An asset can belong to one spouse or both, depending on how it’s titled.

At first glance, these may simply seem like two different ways of dividing ownership between spouses. But that distinction can greatly affect how an asset is taxed after one spouse dies, particularly if it has significantly grown in value.

The reason is cost basis, or generally what you paid for an asset. The more an asset grows beyond that basis, the greater the taxable gain when it’s eventually sold. However, when someone dies owning an appreciated asset, its basis can be “stepped up” to its fair market value on the date of the death, meaning the surviving spouse won’t owe capital gains tax on the appreciation that occurred before the first spouse’s death.

Here’s where the two systems can make a big difference: If spouses jointly own an asset in one of the 39 common law states, generally only the deceased spouse’s share receives that step-up. The surviving spouse’s share keeps its original basis, meaning any appreciation that occurred before the transfer remains subject to capital gains tax when the asset is later sold.

Community property can receive more favorable tax treatment. When one spouse dies, both spouses’ shares generally receive a step-up in basis, potentially eliminating that built-in taxable gain for the surviving spouse. For couples in common law states, however, this historically left a valuable tax benefit out of reach.

Enter the Community Property Trust

Over time, a handful of common law states, including Kentucky and Tennessee, have passed laws allowing married couples to opt into community property treatment for their assets by creating a community property trust (CPT). However, couples do not need to live in one of these states to take advantage of the law. Instead, they can use an out-of-state community property trust by naming a qualified trustee (like Baird Trust) in that state. Once the assets are transferred into the trust, they are treated as community property, which often allows the couple to take advantage of the tax benefits.

How a CPT Works in Practice

Jack and Mary live in Ohio, a common law property state. In 2000, they purchased five acres of farmland for $200,000, but by the time Jack passed away this year, the land had appreciated to $1.2 million. If the couple hadn’t put the land into a community property trust, only Jack’s half of the property, worth $600,000, would’ve received a basis adjustment at death. Mary’s original $100,000 cost basis in her own half would have remained the same, so when she sold the land, she would be left paying tens of thousands of dollars in capital gains taxes.

However, since Jack and Mary put the land into a community property trust, the entire $1.2 million value became the new basis at Jack’s death. When Mary ultimately sold the land, her capital gains were the difference between the sale price and the adjusted $1.2 million cost basis.

The Perils and Pitfalls of a Community Property Trust

While community property trusts certainly come with their benefits, there are potential downsides to look out for as well:

	Administrative costs: Establishing and funding a CPT requires legal drafting, a qualified trustee and ongoing administration, which all come with fees.
	Divorce considerations: Because assets in a CPT are equally owned by both spouses, this can affect how they’re divided in a divorce.
	Creditor risk: Depending on the state, CPT assets may be accessible to one spouse’s creditors.
	State tax differences: Some states, like Kentucky, may still impose state income tax on taxable gains.
	IRS uncertainty: CPT laws are relatively new, and additional IRS guidance could affect how tax benefits are treated in the future.

Deciding Whether a Community Property Trust Is Right for You

CPTs generally make the most sense for couples with significantly appreciated, non-retirement assets they expect to hold during their lifetime rather than sell. These might include a brokerage account, family farm, rental property or other assets that have grown in value.

But tax savings are only part of the equation. Establishing a CPT means converting assets to community property and taking on additional costs and considerations. The greater the appreciation, and the longer you expect to hold the asset, the more worthwhile it may be to explore using a CPT.

The rules and tradeoffs of CPTs depend largely on your family’s unique situation. Thoughtful planning with your Baird Financial Advisor, estate attorney, accountant and Baird Trust Associate can help you determine whether the potential tax benefits of a CPT outweigh its costs and considerations.