New Mexico Estate Planning: Community Property Trust Advantages
Mar 15, 2022
New Mexico Estate Planning: Using Community Property Trusts for Double Step-Up
New Mexico’s status as a community-property state offers unique estate planning opportunities for married couples. One of the most significant advantages is the potential for a full step-up in basis on appreciated assets when the first spouse passes away. This can result in substantial income-tax savings for surviving spouses and heirs.
Benefits
Income-tax savings: When assets are held as community property, both halves of the property receive a new, stepped-up basis at the first spouse’s death. This can eliminate years of built-in capital gains, reducing or even erasing capital-gains taxes if the assets are later sold by the surviving spouse or heirs.
Simplified titling: Community property trusts allow both spouses’ interests in the property to be treated as community, ensuring the full step-up applies. This can make post-death administration and future sales much simpler and more tax-efficient.
How to Implement
Establish a Community Property Trust and fund it with eligible assets, such as brokerage accounts, real estate, and other investments. Not all assets qualify, so it’s important to review each asset’s ownership and titling.
Maintain clear and accurate records to distinguish between separate and community assets. Only assets that are truly community property will receive the double step-up in basis. Commingling separate and community property can create confusion and may jeopardize the tax benefits.
Review beneficiary designations and coordinate with other estate planning documents to ensure consistency and avoid unintended consequences.
Risks & Safeguards
Creditor exposure: In New Mexico, creditors of either spouse may be able to reach community assets. To help protect valuable property, some families use asset-protection strategies such as holding real estate or business interests in limited liability companies (LLCs) before transferring them to the trust.
Complexity: Community property trusts require careful drafting and ongoing management. Mistakes in titling or recordkeeping can result in loss of tax benefits or legal disputes among heirs.
Changing laws: Tax and property laws can change. What works today may not be effective in the future, so periodic review of your estate plan is important.
When structured and maintained properly, a community property trust can yield six-figure tax savings for heirs and provide peace of mind for families. However, the rules are nuanced, and the benefits depend on accurate asset classification and compliance with New Mexico law.
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Disclaimer: This blog post provides general information for educational purposes only. It is not legal advice. Estate planning outcomes can vary widely based on individual circumstances, family dynamics, and the evidence available. For decisions about your own situation, consider your unique facts and keep in mind that laws and regulations change over time.