The Alaska Community Property Trust is a specific type of trust that allows you to transfer assets to children and grandchildren in an asset protected manner while reducing or eliminating income tax on highly appreciated assets.
Under the Internal Revenue Code, when someone sells an asset they must pay income tax on the amount above their “basis” in the property. In its most simplified sense, basis is the amount you paid for an asset when you purchased it, or if you received it by gift, it is the donor’s basis in the property. For example, if you purchased 100 shares of Microsoft stock for $10 per share, your basis would be $1000. If you sold these shares today you would pay income tax (at capital gain rates) on the sale price less $1000.
The Internal Revenue Code also provides that when an individual dies, most property that he or she owns receives a “step up” in basis to its fair market value on the date of death. With a married couple, in the majority of states (the so-called Separate Property States), only that property owned by the deceased spouse receives this basis adjustment. Therefore, if each spouse owns 50% of the property, one-half of their property receives a step-up in basis.
However, married couples who live in the ten Community Property states (Alaska, Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas Washington, Wisconsin) and hold their property as community property receive a full “step up” in basis to the date-of-death value upon the death of the first spouse to die. Thus, residents of community property states receive a significant capital gains tax benefit by holding appreciated property as community property.
The Alaska Community Property Trust permits non-Alaska residents to “borrow” the Alaska Community Property law and avoid capital gains on their highly appreciated property upon the death of the first spouse. With this strategy, you transfer highly appreciated property to a trust drafted to take advantage of the Alaska Community Property Trust law, which includes the requirement that an Alaskan Trustee oversee the trust property. Then, upon the death of the first of you to die, the entire property steps up to its date-of-death fair market value. The survivor of you or your beneficiaries can then sell the property and be subject only to post-death gains.