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Which State is the Best State to Create my Estate Plan?

The best reason to do your estate plan in Arizona is because Arizona is one of only 9 states that is a community property state. The other community property states are: 1) California, 2) Nevada, 3) New Mexico, 4) Idaho, 5) Washington, 6) Wisconsin, 7) Texas, and 8) Louisiana. The main reason to do your estate planning in a community property state is minimize taxes. There are all sorts of taxes that you need to be aware of-income tax, inheritance tax, gift tax, estate tax, generation skipping transfer tax, state estate tax, excise tax, capital gains tax. The one that we are concerned with avoiding when we talk about a community property state versus all other states, which are what we call separate property states, is the capital gains tax.

In a community property state we are able to wipe out any capital gains tax on community assets because we get a full step up in tax basis when a loved one dies. I think an example would best illustrate what I mean by a step up in tax basis. Let’s say that you and your spouse purchased some property in Arizona back in 1970 as an investment for $10,000.  Let’s say that that same community assets is worth $110,000 today, in 2014. Your original cost basis in the property is $10,000 and it has now appreciated to $110,000. You have a $100,000 gain in the property. If you sale the property this year for $110,000 then you owe a capital gains tax on the $100,000 gain. In the alternative, had you not sold the property this year, but instead held on to it and died this year leaving it to your spouse and then your spouse sold it for the $110,000 she would not have to pay any capital gains tax on it. This is because the IRS would have allowed her to step up the cost basis in the property from the original $10,000 cost basis in 1970 to the date of death fair market value of $110,000, effectively wiping out any gain in the property.

How would this same scenario play out in any other state that is not a community property state? When the first spouse died the surviving spouse only gets a half step up in tax basis on the property. Remember the original cost basis was $10,000 in 1970 and now in 2014 it is worth $110,000, which means a $100,000 gain. In a separate property state the survivor only gets a step up in basis on half the property-$50,000- and therefore has to pay capital gains tax on the other half- $50,000. This is not great planning.

If you can choose between having your estate plan done in a community property state versus a separate property state you should choose community property every time. The attorneys at the law firm of Morris Hall have been practicing in estate planning for 42 years. We would love to help you create your estate plan in the wonderful Wild West state of Arizona.

Scottsdale and Glendale Estate Planning Attorney, David Eastman Contributed by MH Arrowhead, Scottsdale and Phoenix Estate Planning Attorney and Partner, David T. Eastman.

 About Morris Hall:
At Morris Hall, we have focused our legal practice on estate planning for over 40 years.  Along with estate planning, our attorneys help clients and their families with matters of probate, trust administration, wills, power of attorneys, business planning, succession planning, legacy planning, charitable gifting and other important legal aspects.  We also have divisions in financial, real estate and accounting to help you incorporate all of your planning together, ensuring that everything works perfectly for your needs and situation. Our Arizona offices are located in Phoenix, Mesa, Scottsdale, Cave Creek, Tucson, Prescott, Flagstaff and Arrowhead.  Our New Mexico offices are located in Albuquerque, Las Cruces and Santa Fe.  Contact us today at 888.222.1328 to schedule an appointment!

This blog should be used for informational purposes only.  It does not create an attorney-client relationship with any reader and should not be construed as legal advice.  If you need legal advice, please contact an attorney in your community who can assess the specifics of your situation.

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