Tennessee is not a traditional community property state. But married couples have an option that can change how selected assets are owned: a Tennessee community property trust.

The attraction is usually tax planning. Qualifying community property can receive a basis adjustment on both spouses’ shares when the first spouse dies, potentially reducing capital gains on a later sale. For a couple with highly appreciated investments or real estate, that can be significant.

The tradeoff is equally important. Electing into community property changes actual property rights. It can affect what happens in a divorce, what each spouse can leave at death and what creditors can reach. Here is how Tennessee’s option works and what to consider before signing.

What does “electing into community property” mean in Tennessee?

Under the Tennessee Community Property Trust Act of 2010, Tenn. Code Ann. §§ 35-17-101 through 35-17-108, married spouses can transfer some or all of their property to a qualifying trust. Property owned by that trust is treated as community property under Tennessee law during the marriage.

This is not a box checked on an income tax return. It requires a properly drafted, signed and funded trust. Simply opening a joint account, adding a spouse to a deed or signing an ordinary joint living trust does not create a Tennessee community property trust.

The election also does not automatically convert everything the couple owns. Spouses can select particular assets for the trust and leave other assets outside it.

The potential benefit: a basis adjustment on the whole asset

Tax basis is the starting point for calculating gain or loss when an asset is sold. For investments, it generally begins with the purchase price and is adjusted as required by tax law.

When one spouse dies, an ordinary qualifying spousal joint asset generally receives a basis adjustment only on the deceased spouse’s half. The surviving spouse’s half keeps its existing basis.

For qualifying community property, Internal Revenue Code § 1014(b)(6) can extend the adjustment to the surviving spouse’s half as well. At least half of the community property’s value must be includible in the deceased spouse’s federal gross estate. Estate inclusion is not the same as owing estate tax; the rule can apply even when no federal estate tax return is required.

People often call this a “double step-up in basis.” It means both halves may be adjusted to fair market value, not that the basis becomes twice the property’s value. If an asset has declined in value, the adjustment can be a step-down instead.

A simplified example

Suppose a married couple owns a taxable investment portfolio with a total adjusted basis of $200,000. It is worth $1 million when the first spouse dies.

• With ordinary qualifying spousal joint ownership, the deceased spouse’s half generally receives a $500,000 basis. The survivor’s half keeps its $100,000 basis. Total basis: $600,000.
• If the entire portfolio qualifies for community property basis treatment, total basis generally becomes $1 million.

An immediate sale for $1 million would therefore produce approximately $400,000 of gain in the first scenario and no gain in the second, before selling costs and other adjustments. That illustrates the goal of the strategy, not a guaranteed result for a Tennessee elective trust.

The federal tax qualification needs careful review

Tennessee law determines the property rights created by the trust. It does not, by itself, guarantee the intended federal tax treatment.

IRS Publication 555 expressly states that it does not address the federal tax treatment of income or property subject to the community property election under Tennessee, Alaska or South Dakota law. Tennessee Bar Association educational materials also identify the unresolved federal qualification issue for elective community property trusts.

Separately, the IRS’s Internal Revenue Manual discusses Commissioner v. Harmon and takes a restrictive position on elective community property systems for income-reporting purposes. That discussion is not a direct ruling on a Tennessee trust’s basis adjustment under § 1014(b)(6), but it is a reason not to assume that every federal community property rule applies automatically.

The practical takeaway: have the estate-planning attorney and tax adviser evaluate the intended basis treatment together. A Tennessee community property trust should not be sold as an IRS-approved guarantee of a full basis step-up.

What does Tennessee require?

Under Tenn. Code Ann. §§ 35-17-102 and 35-17-103, the arrangement must meet specific requirements:

• The trust must expressly declare that it is a Tennessee community property trust.
• Both spouses must sign it.
• One or both spouses must actually transfer property to it.
• At least one trustee must be a Tennessee resident or a company authorized to act as a fiduciary in Tennessee. That qualified trustee must have the required recordkeeping and tax-return preparation or arrangement powers. Either or both spouses may also serve as trustees.
• The trust must begin with the statute’s prescribed warning in capital letters about its potentially extensive consequences, including rights during marriage and at divorce.

Funding is not a formality. Real estate generally requires an appropriate recorded deed; brokerage assets require the necessary account and ownership changes. Signing the trust document alone does not transfer those assets.

The biggest tradeoff: you are changing ownership rights

Consider a spouse who inherited a valuable investment account and has kept it separate. Transferring it to a Tennessee community property trust is not merely attaching a tax label. The spouse is changing the legal character of that property.

Under § 35-17-108, dissolution of the marriage terminates the trust. The default rule requires the trustee to distribute half of each trust asset to each spouse unless both spouses agree otherwise in writing. That can be a very different outcome from keeping inherited or premarital property separate.

At death, § 35-17-107 treats half of the trust’s aggregate value as the survivor’s share and half as the deceased spouse’s share. The trust’s dispositive terms determine where the deceased spouse’s share goes; community property status does not automatically leave everything to the survivor.

These issues deserve particular attention in a second marriage, a blended family, or a marriage involving significantly unequal assets. Any prenuptial or postnuptial agreement must be reviewed alongside the trust. Separate legal advice may be appropriate where the spouses’ interests differ.

Do not confuse this with an asset-protection trust

Section 35-17-106 permits an obligation incurred by one spouse, before or during marriage, to be satisfied from that spouse’s half of the community property trust. Obligations incurred by both spouses during marriage may be satisfied from the trust.

Moving assets from another ownership arrangement can also change existing creditor protections. Tennessee tenancy-by-the-entirety property, for example, needs a specific comparison before retitling. Pending claims, business guarantees and bankruptcy concerns should be reviewed before any transfer.

Which assets deserve a closer look?

The strategy is most worth evaluating for substantially appreciated taxable investments, investment real estate and certain business interests that the couple expects to hold until death.

It is not a reason to move every asset into one trust. Cash has little built-in gain to address. IRAs and 401(k)s should not simply be retitled into the trust; retirement accounts have their own ownership, beneficiary and income-tax rules. Business interests may have transfer restrictions, and S corporation stock requires special trust-eligibility planning. Mortgages, title insurance and other real-estate consequences also need review.

A sale during both spouses’ lifetimes does not receive a death-related basis adjustment merely because the property is in the trust. Timing matters, as do legal fees, trustee fees and ongoing administration.

Can couples outside Tennessee use the option?

Section 35-17-105 allows spouses to use a Tennessee community property trust whether both, one or neither lives in Tennessee. The qualified-trustee requirement still applies.

For nonresidents, however, the analysis does not stop with Tennessee law. The couple’s home-state marital-property rules, choice-of-law principles and the law governing any out-of-state real estate must also be considered. Choosing Tennessee law does not automatically override those rules or eliminate another state’s taxes. See our guide to trust situs and out-of-state property.

Questions to answer before electing in

• What does each asset cost for tax purposes, what is it worth now and how much gain is actually at stake?
• Are both spouses comfortable changing their ownership rights, including the default divorce outcome?
• Who can manage, withdraw or distribute property, and who receives each share after death?
• What amendment and revocation rights does the document provide? Except for a spouse’s statutory right to amend the death disposition of that spouse’s half, § 35-17-104 requires the agreement itself to authorize amendment or revocation.
• Would funding the trust affect creditor protection, an existing marital agreement or a plan for children from a prior relationship?
• Who will maintain the qualified-trustee connection, records and tax reporting?

The bottom line for Tennessee estate planning

A Tennessee community property trust can be a useful planning option for married couples with appreciated assets. But the decision is not simply whether a larger basis adjustment sounds attractive. It is whether the potential tax benefit justifies the ownership changes, federal tax uncertainty and administration for your particular family.

Ginsburg Law Group helps families coordinate trusts, property ownership and estate-planning goals. If you are considering a Tennessee community property trust, contact us to review how the option fits your assets, your marriage and your broader estate plan.

This article is for general informational purposes and is not legal or tax advice. The appropriate structure and tax treatment depend on the trust terms, applicable law and your circumstances. Consult an estate-planning attorney and qualified tax adviser before transferring property.

Sources and further reading

• Tennessee Community Property Trust Act, Tenn. Code Ann. §§ 35-17-101 through 35-17-108 (statutory text reproduced by Justia).
• 26 U.S.C. § 1014, including subsection (b)(6), community property basis adjustments.
• IRS Publication 555, Community Property, including its express limitation concerning Tennessee elective community property.
• Internal Revenue Manual § 25.18.1.2.3, elective systems and income reporting.
• Tennessee Bar Association: Tennessee Community Property Trusts, David Bate Parsons, February 26, 2025 (educational materials).