In 1998, Alaska enacted a state statute that allowed for non-Alaska residents use a trust to elect community property status for their non-Alaskan property. Thus, Montanan’s can have their real property (i.e. homes and ranches located in MT) and their personal property treated as community property. The ability to elect community property status for individuals who live in non-community property states is an amazing income tax planning tool. This tool is one of the few income tax planning tools that benefit the surviving spouse of and not subsequent children and heirs.
How the Alaska Community Property Trust Works:
- First, proper provisions need to be added to a standard Revocable Living Trust.
- Second, an Alaska administrative trustee must be appointed. An administrative Alaskan trustee costs around $ 2,500 to 5,000 a year. The trust is essentially renting Alaskan residency. The assets under management can stay with their local manager. However, the Alaska administrative fee can be mitigated if the Alaska trustee has assets under management.
- Third, an election to treat the Alaskan trust property and community property must be made.
- Finally, when the first spouse dies IRC § 1014(b)(6) results in the surviving spouse getting a step-up in basis on the entire property and not just the decedent spouse’s (1/2) share.
This tool is extremely effective if an individual knows that they have a limited time left to live and they own significantly appreciated property. Paying an Alaska trustee $ 2,500 for two or three years can easily be justified if the surviving spouse received a full step up of basis on all the marital property in the trust.
Example: Husband and wife own a ranch worth $ 10,000,000 with an adjusted basis of 1,000,000. There are other marital assets worth $ 250,000. The wife cannot run the ranch by herself and will move into a town (Bozeman) when husband dies. The Husband is notified that he has cancer and 2 years left to live. Normally, the wife would get a step up in basis on her husband’s half of the ranch (5 million). Thus, the Wife would have a basis after his death of $ 5,500,000. When she sells the ranch for 10,000,000 she will have $ 4,500,000 of taxable gain at 20%. This will result in a tax bill from the IRS in the neighborhood of 900,000. If an Alaska community property trust is used, there is a step-up of basis in both the husbands and wife’s share (IRC 1014(b)(6)). The property will have a basis of $ 10,000,000 and the sale of the land will result in NO income tax.
We cannot not transfer the ranch to the husband because we exceed his 5,250,000 unused exclusion. Also, the Alaska community trust strategy avoided certain IRC restrictions on transfers made when death in eminent.