The Tax-Saving Trust Most Married Couples Have Never Heard Of

If you’re married, live in Kentucky or a neighboring state, and own property that’s grown in value over the years—your home, a small business, maybe even some investments—you need to know about a powerful, under-the-radar estate planning tool called a Community Property Trust (CPT).

It’s not just legalese. For some couples, it’s the difference between leaving your spouse with a tax-free inheritance… or a six-figure IRS bill.

The Capital Gains Tax Trap Most Families Don’t See Coming

You probably already know this: when you sell something for more than you paid for it—a home, land, stocks—the government wants a cut. That’s called capital gains tax.

Say you bought your house back in 1995 for $150,000. Today it’s worth $750,000. If you sell it, that $600,000 profit gets taxed. And depending on your tax bracket, that could mean a bill in the tens of thousands.

But here’s where it gets even trickier—especially if your spouse passes away before you do.

The “Step-Up in Basis” Rule (and Its Hidden Limitation)

When one spouse dies, the IRS gives the surviving spouse a break: the value of the deceased spouse’s half of the property gets “stepped up” to its current market value. That can reduce or eliminate taxes—but only on their half.

In most states (like Kentucky), if you and your spouse owned that $750,000 home together:

• Their half gets stepped up to $375,000 (no tax on their side).

• Your half stays locked at the original $75,000—and you’re still on the hook for taxes if you sell.

It’s a quiet tax penalty on widows and widowers. And most people don’t realize it until it’s too late.

The Community Property Trust: A Legal Workaround With Big Benefits

In a few Western states—like Texas, Arizona, and California—community property laws give married couples a major advantage: when one spouse dies, BOTH halves of the property get a full step-up in basis. That means the surviving spouse can sell everything and owe zero capital gains tax.

A Community Property Trust allows you to get that same benefit—even if you don’t live in one of those states.

It’s like planting a legal flag in Texas without ever leaving Kentucky.

When you transfer qualifying assets into a CPT, you’re telling the IRS: “Treat this property like we live in a community property state.” And when it’s done properly, it works.

Real-World Example: The House That Becomes a Tax Burden

Back to that $150,000 house now worth $750,000.

Without a CPT: Your spouse passes away. You sell the house. You still owe capital gains tax on your half of the gain—about $300,000. That could mean $45,000 to $75,000 or more in taxes, depending on your income and location.

With a CPT: The whole property gets a step-up to $750,000. You sell it the next day. Zero capital gains.

That’s not just a tax trick. That’s a financial lifeline for your family.

Who Should Consider a Community Property Trust?

This tool isn’t for everyone. But if you check these boxes, it’s time to talk to a qualified estate planning attorney:

• You’re married

• You live in a common law state (like Kentucky)

• You own assets with your spouse that have grown significantly in value

• You want to protect your spouse and your legacy from unnecessary taxes

Yes, there are technical rules. And no, this isn’t something you want to DIY off the internet. But for many couples, a Community Property Trust is the single most effective way to avoid a surprise tax hit during one of life’s hardest moments.

The Bottom Line

Estate planning isn’t just about what happens when you’re gone. It’s about protecting the people you love from financial chaos—and making sure the government gets less than it’s hoping for.

A Community Property Trust can help make that happen. Let’s talk about whether it’s the right move for your family.

Disclaimer: This post is for informational purposes only and does not constitute legal or tax advice. Every situation is different. Always consult a qualified estate planning attorney and tax advisor before making decisions about trusts.