Alaska Community Property Act

L ess than a year after the enactment of the Alaska Trust Act, the Alaska legislature again created planning opportunities for residents and nonresidents by passage of the Alaska Community Property Act (AS 34.77), signed into law on May 22, 1998.

Historically, Alaska has not been a community property state; married Alaskans have held assets as separate property. There can be advantages to holding assets as community property and the legislature had at least two benefits in mind when it drafted this new law. First, many married Alaskans come from other states, some of which might be community property states. The new statute offers those Alaskans the option of holding their marital assets within the community property system to which they are accustomed. Second, it is now possible, in Alaska, for a surviving spouse to obtain the income tax benefit of the full step-up in basis under Sec. 1014(b)(6), formerly available only to residents of community property states.

Nonresidents may also create community property under Alaska law by entering into a written "Community Property Trust." Assets that couples wish to classify as community property are transferred to the trust.

The Alaska statute is elective. In most community property states, the form of ownership is mandatory. Alaska still retains the same common-law rule of tenants-by-the-entirety form of holding assets between married persons. But now, spouses can enter into a written agreement designating all (or specific) assets as community property.

The requirements for a binding Community Property Agreement are set out in the statute. Specific language must be included in the agreement to confirm that the parties understand the consequences of the transfer. The community property system is one in which the spouses equally share in the profits and losses generated by community property, regardless of contribution. In the unfortunate event of divorce, community property is likely to be divided equally. Couples in long-term, stable marriages are more likely to be interested in electing community property status for part or all of their assets.

It is expected that community property created under Alaska law will be treated as community property for Federal tax purposes and will provide opportunities for future reduction in income taxes. With that in mind, spouses may want to consider election of community property status for low-basis assets with significant appreciation; a surviving spouse's half of community property is deemed (under Sec. 1014(b)(6)) to have passed from a decedent and, thus, gets a step-up in basis. Business interests, real estate and brokerage accounts are assets for which this planning idea might be considered; assets with a high basis and low market value would not be appropriate.

Example: Husband H and wife W own stock as joint tenants, with a $50,000 basis and $100,000 fair market value. If H dies, half of the stock will be in his estate and will receive a basis step-up to $50,000. W then owns 100% of the stock, with an original basis in half of $25,000, plus a stepped-up basis of $50,000 in the other half, for a $75,000 total basis. If the stock were then sold for $100,000, the gain would be $25,000. If the stock had been held as community property, the gain would be zero, because of the deemed step-up in basis for property held by W.

Creditor protections have been built into the statute to protect the rights of a spouse's creditors and "bona fide purchasers" dealing with a spouse. Conversion of assets to community property may change the rights of the creditors of one spouse to include the other spouse.

Because of the uncertainty surrounding potential litigation providing estate tax relief, the nontax consequences of partially or fully adopting community property ownership may be as important as the tax benefits.

In future estate planning, asset ownership as community property vs. common-law property should be a consideration, keeping this unique opportunity in mind.

From Chris Morse, CPA, Swalling & Associates, P.C., Anchorage, AK