Community Property Estate Planning: The Double Step-Up Basis Advantage (2026)

If you live in one of the nine community property states — or have moved from one — you have access to a tax benefit that common law couples cannot replicate: a full step-up in basis on both halves of appreciated marital property at the first spouse's death. Under IRC §1014(b)(6), this can eliminate hundreds of thousands of dollars in capital gains tax that would otherwise follow your heirs when they sell. But the benefit is easily lost through incorrect titling, the wrong trust structure, or a move across state lines without proper planning.

The 9 community property states (plus Alaska and 5 elective states)

Community property is a marital property system under which most assets acquired during the marriage belong equally to both spouses. Nine states follow community property rules automatically:¹

Additionally, five common law states now allow married couples to create a community property trust to elect community property treatment: Alaska (separate from its general opt-in), Florida, Kentucky, South Dakota, and Tennessee. We cover these below — with an important caveat about unresolved IRS guidance.

The double step-up in basis under IRC §1014(b)(6)

The most significant estate planning advantage of community property is the double step-up in basis at the first spouse's death.

Under general IRC §1014, when an heir inherits an asset, the basis is reset to fair market value on the date of death — eliminating all capital gains from the original owner's lifetime. For a married couple in a common law state who own an asset as joint tenants with right of survivorship (JTWROS), only the deceased spouse's half receives this step-up. The surviving spouse's half retains the original carryover basis.²

Under IRC §1014(b)(6), community property is different: the entire asset — both the decedent's half and the surviving spouse's half — receives a full step-up to date-of-death fair market value at the first death. The surviving spouse can sell the next day with zero capital gains tax.

Worked example: $3M stock position

Federal LTCG rate 23.8% = 20% + 3.8% NIIT for HNW filers (2026). State capital gains tax varies — California adds up to 13.3% on the same gain.

The $333,200 difference is purely from state of residency and how the property is titled. For a couple with a $10M stock portfolio that cost $500K, the same math produces over $2 million in capital gains tax savings.

Community property vs. common law: key estate planning differences

Holding community property in a revocable trust

A revocable living trust is the correct vehicle for holding community property — but only if the trust is properly drafted and the property is correctly titled inside it. The rules:

• Title the asset into the trust as community property. The trust document should designate community property assets as "community property of [Spouse A] and [Spouse B]," not as tenants in common or joint tenants. Many off-the-shelf trust forms miss this, converting community property to tenancy-in-common and losing the double step-up.
• California community property with right of survivorship (CPWROS). California allows a hybrid: community property that automatically passes to the surviving spouse at death without probate. This preserves both the double step-up and the simplicity of right of survivorship. It requires a signed, notarized agreement between spouses.
• Get a community property agreement. In CA, WA, and several other states, spouses can execute a written community property agreement confirming that all their assets are held as community property. This creates a bright-line paper trail that protects the double step-up in basis in case of an IRS audit.

What happens when you move? Quasi-community property

Moving between community property and common law states is one of the most complex multi-state estate planning scenarios. The rules depend on where you're moving to:

Moving from a common law state to California (or AZ, NM, WA, ID)

These states recognize quasi-community property — property that was acquired while living in a non-CP state, but that would have been community property if the couple had lived in California at the time. For estate planning purposes, quasi-community property is treated identically to true community property at death. The double step-up in basis applies.³

Example: A couple lived in New York for 20 years, accumulated $8M in a brokerage account, then retired to California. That $8M is quasi-community property in California. At the first spouse's death, California will treat both halves as having received a step-up in basis.

Moving from California to a common law state (e.g., Florida, New York)

This is the more dangerous scenario. True community property acquired while living in California retains its character as community property even after the move — technically. But the new state may not recognize California's community property rules for probate and death purposes. Florida, for example, does not recognize quasi-community property.

The practical risk: if the couple moves to Florida and retitles their brokerage account into JTWROS (as many Florida brokers default to), they permanently convert the property to common law property — losing the double step-up. The IRS follows the law of the state where the decedent was domiciled at death. If you die domiciled in Florida with JTWROS accounts, you get a single step-up regardless of where you originally accumulated the assets.

Community property trusts in common law states

Since 2020, five common law states have enacted legislation allowing married couples to create an elective community property trust: Alaska, Florida, Kentucky, South Dakota, and Tennessee. By transferring appreciated assets into such a trust, couples in these states can potentially elect IRC §1014(b)(6) treatment — getting the double step-up at the first death even though they live in a common law state.⁴

The IRS caveat: The IRS has not issued formal guidance confirming that elective community property trusts in common law states trigger IRC §1014(b)(6). IRS Publication 555 explicitly excludes these arrangements. Tax practitioners widely believe the full step-up should apply because the relevant statute refers to property held "under the community property laws of any State," and these states have now enacted such laws. But there is no ruling, no private letter ruling, and no court case confirming this treatment as of May 2026. Couples using this strategy should understand it as a well-reasoned but unconfirmed position.

If you're considering a community property trust as a common law state resident to capture the double step-up, the risk-adjusted calculus usually favors it for large positions — the downside (IRS disallows, you get a single step-up like everyone else) is recoverable; the upside (IRS confirms, you eliminate millions in capital gains) is not.

Community property and trust strategies (SLATs, GRATs, IDGTs)

Community property status intersects with irrevocable trust strategies in ways that trip up many advisors:

SLATs: must use separate property

A Spousal Lifetime Access Trust (SLAT) requires one spouse to make a completed gift to an irrevocable trust for the other spouse's benefit. Community property cannot be transferred to a SLAT without first being converted to separate property — which requires both spouses' written consent and careful documentation. Using community property in a SLAT without proper conversion creates an incomplete-gift risk (the non-contributing spouse still owns their 50%) and can trigger IRS challenges.

For CA/TX/WA couples wanting to implement a SLAT, the typical approach is: identify separate property assets the contributing spouse owns outright (pre-marital property, inheritance, gifts to that spouse individually) and use those for the SLAT. Alternatively, convert community property to separate property by written agreement — recognizing that this conversion eliminates the double step-up for those assets.

GRATs and IDGTs: generally workable with community property

A GRAT or IDGT installment sale can be funded with community property with spousal consent. The transfer of community property to an irrevocable trust is treated as a gift from both spouses (each contributing their 50%), which counts against both spouses' lifetime exemption (or 50% each). The annuity payments return to the grantor's estate, and any remainder transfers gift-tax free to heirs. For community property couples, both spouses' gift tax returns (Form 709) must report their respective 50% shares.

The A-B trust structure (credit shelter + marital trust)

Traditional A-B planning (where the first spouse's estate funds a bypass/credit shelter trust up to the exemption amount and the remainder passes to a marital trust) is more complex with community property. Because each spouse already owns their 50%, the surviving spouse doesn't "inherit" — they already own their half. Only the decedent's half needs to be allocated. For this reason, most modern CP estate plans use portability + a revocable trust rather than A-B trusts, unless state estate tax (e.g., Washington State) makes a bypass trust valuable for state tax reasons.

Portability and community property

The federal portability election (Form 706 filed within 9 months of death to preserve the deceased spouse's unused estate tax exemption — the "DSUE") applies equally to community property couples. Since each spouse already owns their 50% of community property, the estate of the first to die includes only that 50%, which may be well below the $15M federal exemption. Filing a portability election is still valuable for families with significant separate property or for future growth that might exceed the surviving spouse's exemption.

See the full portability election guide for Form 706 deadlines, the Rev. Proc. 2022-32 late-election window, and how DSUE interacts with state estate taxes (most states don't recognize portability).

5 costly community property estate planning mistakes

1. Retitling CP to JTWROS when opening new accounts. Banks and brokers default to joint tenancy. If you sign the account-opening form as "JTWROS" without thinking about it, you've converted community property — permanently losing the double step-up for that asset. Check every account title periodically.
2. Funding a SLAT with community property without a prior conversion agreement. This creates incomplete-gift risk and a potential §2036 argument that the contributing spouse didn't give up enough control because their spouse already owned 50%.
3. Moving from CA to FL without updating estate plan. If you relocate without addressing property titling, you may end up with assets that technically retain CP character but are mis-titled in a way the IRS or a Florida court won't honor. Update the trust and all account titles within 90 days of the move.
4. Failing to execute a community property agreement. Without a written agreement, disputes about whether a particular asset is community or separate property fall to state law defaults — which may be different from what you intended. A CP agreement creates a clear paper trail for the double step-up.
5. Ignoring Washington State's estate tax. Washington is a community property state with a state estate tax (exemption ~$3M+, top rate being reduced from 35% to 20% effective July 1, 2026). The double step-up benefit is valuable in Washington — but married couples with large estates also face state estate tax planning that most other CP states don't require. A-B trust or bypass trust planning is often appropriate specifically for the Washington State estate tax.

Is community property more valuable after OBBBA?

Yes. The One Big Beautiful Bill Act (July 2025) permanently set the federal estate tax exemption at $15M per individual. For families with estates below $15M per person, federal estate tax is no longer a primary concern — and the focus of planning shifts to minimizing income taxes and capital gains taxes. That's precisely where the community property double step-up shines most.

For families with $2M–$15M in net worth: federal estate tax exposure may be near zero, but accumulated capital gains on a concentrated stock position, appreciated real estate, or a closely-held business can still represent a 20–24% haircut on years of wealth accumulation. The double step-up can eliminate that exposure entirely. For families above $15M, the community property step-up advantage must be weighed against whether gifting strategies (SLAT, GRAT, IDGT) create more estate tax savings than the step-up provides — a calculation your advisor should model explicitly.