Community Property Trust Double Step-Up: 5 States, No IRS Ruling

What section 1014(b)(6) says, and what it leaves open

The starting point is the ordinary step-up rule: the basis of property acquired from a decedent is “the fair market value of the property at the date of the decedent’s death” (26 U.S.C. 1014(a)(1)), which is the rule our step-up in basis guide walks through for real estate. Section 1014(b) lists what counts as acquired from the decedent. Paragraph (6) covers, for decedents dying after December 31, 1947, “property which represents the surviving spouse’s one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State,” provided at least one-half of the whole community interest was includible in the decedent’s gross estate. Treasury Regulation 1.1014-2(a)(5) repeats the rule and adds that no estate tax return has to be required for it to apply.

Two things follow from that wording. First, the statute says “any State” and does not list them. Second, it asks whether the property is held under the community property laws of a State, not whether the couple lives in a community property state. IRS Publications 551 and 555 describe the rule only for nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin). Publication 551 (Rev. December 2025) says that when either spouse dies the total value of the community property, even the part belonging to the surviving spouse, “generally becomes the basis of the entire property.”

The opt-in trust is an attempt to reach that rule from a state that is not on the list of nine. A couple living in, say, Illinois or Ohio signs a trust under the law of one of the five states, names a qualified trustee there, and the trust declares the assets community property. Whether federal law treats that as property “held … under the community property laws of any State” is the open question this page is about. Compare it with title forms that have clear federal answers: spouses who hold as tenants by the entirety get a new basis on only one-half (see tenancy by the entirety by state).

The five statutes side by side

We read the official text for Alaska (akleg.gov), Florida (leg.state.fl.us) and South Dakota (sdlegislature.gov). For Kentucky we read the 2020 Act (HB 155) and the current KRS 386.620 definitions through Internet Archive copies of the legislature’s files; for Tennessee we read Public Chapter 658 (2010) and Public Chapter 166 (2023) from the Secretary of State. We could not read the current compiled Tennessee Code or the current text of KRS 386.622, so later amendments to those two states are not verified.

All five require that the trust expressly declare the property to be community property, that both spouses sign, and that a warning in capital letters open the trust; each warning lists divorce among the consequences, and the Alaska, Florida and South Dakota versions also name creditors. Florida adds a fairness test: a trust signed during marriage is unenforceable if the spouse resisting it proves it was unconscionable or involuntary or that disclosure of the other spouse’s finances was missing (736.1512).

The last column is the most revealing. Two legislatures, Florida in 2021 and South Dakota (with a 2026 update to its reference date), wrote a sentence aimed at the Internal Revenue Code. The other three did not. That sentence is the state’s statement of its own law; the question of whether the federal statute accepts it belongs to federal law.

What is settled and what is not

The private letter rulings deserve a closer look because practitioners often cite them. In Private Letter Ruling 202007010 (IRS letter dated September 18, 2019, released February 14, 2020) the grantors were married and “reside in State 2, a community property state”; their irrevocable trust, sited in another state, provided that everything transferred to it was community property. The IRS concluded the basis of all community property in the trust would adjust to fair market value at the first grantor’s death. Private Letter Rulings 201838003 (released September 21, 2018) and 201653007 (released December 30, 2016) recite the same residence fact. In 202007010 the trust provided that property transferred to it “is and shall retain its character as community property.” A couple in a common-law state is asking a different question: whether property that was not community property becomes so by a trust formed under another state’s statute. The rulings also state that they are directed only to the taxpayer who requested them.

Harmon is the closest Supreme Court authority. The Court asked whether Oklahoma spouses who filed an election under a 1939 optional community property law could each report half of the community income. It said no, observing that the optional Oklahoma system was “not a system, dictated by State policy, as an incident of matrimony.” That was a 1944 decision under the income tax rules for splitting income, not about basis at death, and the statutes of the five states differ from Oklahoma’s in many respects. Whether anyone would invoke it against a modern trust is a question for the IRS and the courts; we found no decision that does.

A worked example (our arithmetic)

The figures are illustrative: a rental bought for $400,000, $150,000 of depreciation taken (adjusted basis $250,000) and a value of $1,000,000 at the first death. We compute the survivor’s basis for the entireties case with the same one-half rule used in IRS Publication 559 and in our tenancy by the entirety page.

The gain at stake in this example is $375,000. Case C is an assumption, not a prediction: if the IRS did not accept the trust as community property, the outcome could differ from case A depending on what the trust and the estate show.

The same rule works in reverse for an asset worth less than cost. With a $1,000,000 asset worth $600,000 at the first death, entireties title leaves the survivor a basis of $800,000 (half of $1,000,000 plus half of $600,000), and qualifying community property leaves $600,000 on both halves, because section 1014(a) sets the basis at fair market value whether that is higher or lower than cost. The double step-up is a tool for appreciated assets, such as the long-held rentals, funds and company stock our readers ask about; for a portfolio with built-in losses it can remove a loss the couple would otherwise keep. Property held in an irrevocable grantor trust is a separate topic with its own basis problem (see IDGTs and the lost step-up).

What the couple gives up

The opt-in is a change in how the couple owns property, not just a tax election. From the statutes we read:

• Control and amendment. In Alaska, Kentucky and Tennessee the trust cannot be amended or revoked unless it says it can, and the statutes let a spouse change the disposition of only their own one-half share at death (Alaska 34.77.100(e); Kentucky section 2(3), (4); Tennessee 35-17-104(b)). Florida lets the settlors amend or revoke unless the agreement is irrevocable (736.1504).
• Divorce. In Florida, Kentucky and Tennessee the trust ends on divorce and each spouse receives one-half of the assets, which overrides whatever the spouses held separately before. The capital-letter warning every statute requires names divorce as one of the consequences.
• Creditors. An obligation incurred by one spouse may be satisfied from that spouse’s one-half share (Florida 736.1506(1); Tennessee 35-17-106(a); Kentucky section 3(1)). South Dakota provides that a revocable trust does not affect a creditor’s interest unless the creditor knew of the trust when the debt was incurred (55-17-11(1)).
• An in-state trustee. Every statute requires at least one trustee who lives, or is licensed, in the state, so a couple elsewhere pays for a trustee in Alaska, Florida, Kentucky, South Dakota or Tennessee.
• Timing under section 1014(e). If appreciated property was acquired by the decedent by gift within one year of death and passes back to the donor or the donor’s spouse, the basis stays at the decedent’s adjusted basis (1014(e)(1)). We found no source that says whether a transfer into one of these trusts counts as a gift for that rule; the first year after funding is a point to raise with the attorney.

None of this is a reason to use or avoid the trust. It is the list of terms a couple should read before relying on a result that the IRS has not confirmed.

Decision points

• Do you live in a community property state already? If so, the nine-state rule in Publications 551 and 555 applies to community property you hold, and the opt-in statutes are not your question.
• Is the asset appreciated? The benefit is the gap between cost and value at the first death. For depreciated assets, both halves can be stepped down.
• Would you accept an unconfirmed federal result? The state statutes are in force; the federal treatment is not confirmed by an IRS ruling or a court we could find.
• Are you prepared for the divorce rule? In Florida, Kentucky and Tennessee the trust ends and assets split 50/50.
• Who is the trustee? Each state requires a qualified in-state trustee; the Alaska, Kentucky and Tennessee statutes allow that trustee’s powers to be limited to keeping records and preparing tax returns.

What a reader can do with this

• Find your state in the tables and read the section numbers in the statute itself on the legislature’s site; Kentucky and Tennessee are the two where we could not confirm the current compiled text.
• List the appreciated assets and their adjusted basis (cost less depreciation) and a value estimate, and compute the gain with entireties or joint title and with a full step-up, as in the example above. The difference is what an unconfirmed position would be worth.
• Ask an estate attorney two questions in writing: whether the attorney has seen the IRS or a court accept the double step-up for a trust-created community property, and what the plan is if it is not accepted.
• Compare with the other ways to reduce the tax at death: the credit shelter and QTIP trust options in our trust and portability guide and the basic rules in step-up in basis for inherited real estate.

FAQ

Sources, read and saved on October 30, 2026: Alaska Statutes 34.77.010 to 34.77.995 (akleg.gov); Florida Statutes 736.1501 to 736.1512 (leg.state.fl.us); South Dakota Codified Laws 55-17 (sdlegislature.gov); Kentucky 2020 Acts chapter 25 and KRS 386.620 (Internet Archive copies of apps.legislature.ky.gov); Tennessee Public Chapters 658 (2010) and 166 (2023) (publications.tnsosfiles.com); 26 U.S.C. 1014 and 2038 and 26 CFR 1.1014-2 (Cornell LII); IRS Publications 551 (Rev. December 2025) and 555 (Rev. December 2024); IRS Private Letter Rulings 201653007, 201838003 and 202007010; Commissioner v. Harmon, 323 U.S. 44 (1944) (Cornell LII). The worked example is our arithmetic. This is analysis of public documents, not investment, legal or tax advice.