TheThe Alaska Community Alaska Community Property LawProperty Law

The Other Alaska Trust LawThe Other Alaska Trust Law

WealthCounsel Advisors ForumWealthCounsel Advisors Forum

Presented byPresented by

Richard H. Foley, Jr. and Susan B. FoleyRichard H. Foley, Jr. and Susan B. Foley

©Copyright Richard Foley and Susan Foley, all rights reserved.

ObjectivesObjectives

• Distinguish Alaska Community Property Law from the Alaska Asset Protection Trust Law

• Explain Community Property Law basics

• Identify benefits of Community Property

• Explain basic capital gain tax concepts

• Identify appropriate applications

What is Community Property?What is Community Property?

• State specific law• Similar to a partnership• Each spouse has a one-half undivided interest in

the property• Property is held as a “whole”• Distinguished from “marital property” • Property acquired by spouses during marriage is

community property regardless of how it is titled

What is Community Property?What is Community Property?

• Creditors of one spouse may be able to reach the “whole” of the community property.

• In separate property states, creditors of a spouse may only reach the separate property of the debtor spouse.

Community Property StatesCommunity Property States

• Alaska

• Arizona

• California

• Idaho

• Louisiana

• Nevada

• New Mexico

• Texas

• Washington

• Wisconsin

Capital Gain TreatmentCapital Gain Treatmentof Propertyof Property

Rental Property purchased for $100K is now has value of $1.1M

$1M gain X .15 percent = $150K tax

John’s RentalIf John dies and gives the property to Mary, she receives a “step up” in basis to the FMV of the property $1.1M

No tax on the sale after John’s death

John’s Death

Capital Gain Treatment of Capital Gain Treatment of Separate PropertySeparate Property

John’s Basis $50,000 Mary’s Basis $50,000

“Step up” of basis for Mary on ½ of the property to $550K. Added to Mary’s basis on the other half results in a new

basis for Mary of $600K.

Upon sale at $1.1 M, capital gains tax is $75K.

John’s Death

Capital Gain Treatment of Capital Gain Treatment of Community PropertyCommunity Property

John’s Basis $50,000 Mary’s Basis $50,000

FULL “step up” of basis for Mary to fair market value of $1.1 M.

Upon sale at $1.1 M, no capital gains tax.

John’s Death

ConclusionConclusion

• Appreciated real estate, marketable stocks or family business held as community property avoids capital gains tax upon sale after the death of the first spouse.

Alaska Community Property LawAlaska Community Property Law

• Passed in 1998.

• Alaska couples who are married may “opt in” by agreement.

• Non-Alaska residents “opt in” by trust.

• Community Property trust requires qualified Alaska Trustee.

• Couples may “pick and choose” assets to be treated as community property.

ApplicationsApplications

• Long-term, stable marriage

• Appreciated property

• Older couples

• Terminally-ill spouse

• Non-Alaska residents who desire to establish an Alaska Community Property Trust

Couples Less Likely to Elect Couples Less Likely to Elect Community PropertyCommunity Property

• Recent marriage where property is kept separate

• Unstable marriage

• Limited appreciated property

• Second marriage with prior children where property is kept separate

Spotting the IssueSpotting the Issue

• Value added planning

• Substantial tax saving

• Part of a more comprehensive plan