Every family’s financial picture is unique—and so are their goals for preserving and protecting wealth. Fortunately, today’s estate planning landscape offers powerful tools for trust administration and asset protection tailored to meet those needs.
Community Property Trusts (CPT) and Domestic Asset Protection Trusts (DAPT) are two sophisticated strategies that can help shield assets, reduce future tax burdens, and support long-term legacy planning. Whether your client is safeguarding a family business, real estate portfolio, or other complex assets, these trust options can offer flexibility, protection, and peace of mind.
Key Advantages of a Community Property Trust
While not appropriate for every family, a Community Property Trust may offer significant benefits in the right circumstances. Alaska, Florida, Kentucky, South Dakota, and Tennessee permit nonresidents to create community property trusts, allowing residents of noncommunity property states to utilize the tax benefits of community property.
Here are some of the key features:
1. Step-Up in Cost Basis
One of the primary advantages of a Community Property Trust is the potential for a full step-up in cost basis upon the death of the first spouse. This means the entire value of the trust’s assets—not just the deceased spouse’s share—may be adjusted to fair market value. As a result, the surviving spouse can potentially minimize capital gains tax. Additionally, a second step-up may occur upon the death of the surviving spouse, further enhancing tax efficiency.
2. Equal Ownership Structure
Assets placed in a Community Property Trust are legally owned equally by both spouses. This equal ownership can offer clarity, balance, and fairness in estate planning—especially when managing complex or high-value holdings.
3. Revocable Flexibility
A Community Property Trust is revocable when established, allowing the couple to retain control and make changes as needed. Assets can be added or removed, offering flexibility as circumstances evolve.
4. Survivor Protection
One-half of all the assets in the trust become irrevocable upon the death of the first spouse. This structure can help protect the surviving spouse from potential claims by creditors or undue influence, while also preserving the couple’s estate plan.
Understanding Tennessee Community Property Trusts
For married couples with low-basis assets—such as appreciated real estate or closely held business interests—a Tennessee Community Property Trust can be a strategic estate planning tool. This unique trust structure allows couples to convert individually or jointly owned assets into community property, but only if those assets are contributed to a community property trust. Simply holding assets jointly does not qualify.
Real-Life Example: Reducing Capital Gains Through a Community Property Trust
Consider a married couple, John and Emily, who purchased a commercial property 30 years ago for $250,000. Over time, the property appreciated and is now worth $1.5 million. Because of the low original cost basis, selling the property could result in a substantial capital gains tax liability.
To address this, John and Emily worked with their advisors to establish a Community Property Trust in Tennessee. They transferred the property into the trust, ensuring it qualified under the state’s trust laws.
When John passed away, the entire property—not just his share—received a step-up in cost basis to its fair market value of $1.5 million. Emily, now the surviving spouse, chose to sell the property shortly after. Because of the step-up, she was able to do so with little to no capital gains tax, preserving more of the proceeds for her future needs and family legacy.
This strategy is particularly relevant in Tennessee, a common-law state. Without a Community Property Trust, assets typically remain titled as separate property and may not qualify for the same tax advantages.
Use of Asset Protection Trusts
A Domestic Asset Protection Trust (DAPT) may serve as an effective trust solution for individuals seeking to safeguard their assets from potential creditors, such as those whose occupations may expose them to increased risk or liability (e.g., doctors, lawyers, athletes, or business owners).
A DAPT can be a beneficial way for high-net-worth individuals or business owners to protect their assets from a lawsuit, bankruptcy, divorce, or a similar financially damaging situation. DAPTs can only be established in states that have laws that allow them, though the trust creator is typically not required to be a resident of the state. These trusts are irrevocable and commonly funded with cash, real estate, business assets, LLCs, or securities.
Currently, 20 states permit DAPTs. Those states include Alabama, Alaska, Connecticut, Delaware, Hawaii, Indiana, Michigan, Mississippi, Missouri, Nevada, New Hampshire, Ohio, Oklahoma, Rhode Island, South Dakota, Tennessee, Utah, Virginia, West Virginia, and Wyoming.
What is a Tennessee Investment Services Trust (TIST)?
One effective tool for shielding assets from future creditors is a Tennessee Investment Services Trust (TIST)—a type of Domestic Asset Protection Trust available under Tennessee law.
This self-settled trust structure allows individuals—especially those with professional exposure to liability—to proactively protect certain assets, while still maintaining some control over their use.
How a TIST Works
A TIST is designed to protect assets from creditor claims, assuming it meets specific legal requirements:
- The trust must be irrevocable.
- A qualified trustee—such as a Tennessee-based corporate trustee—must be appointed.
- The trust must explicitly apply Tennessee law.
- A spendthrift clause must be included to prevent both voluntary and involuntary transfer of the beneficiary’s interest.
Although no longer required, a qualified affidavit signed at the time the trust is created and funded, is often considered best practice. It’s important to note that timing matters. Once assets are transferred to the trust, a process called a qualified disposition begins, with protection starting either:
- 18 months after the transfer, or
- 6 months if the creditor was aware of the transfer at the time it was made.
Tennessee law does allow certain “exempt creditors” to access the trust under limited circumstances. These include:
- Past due child support
- Past due alimony
- Court-ordered division of marital property (limited to the amount of debt, interest, and reasonable costs of collection)
Key Benefits of a Tennessee Investment Services Trust
- Protect Assets
The most attractive feature of a TIST is the ability to protect assets from creditors. Once the asset is in the trust, it is typically off-limits for future creditors. - Maintain Control
While the trust is irrevocable, a TIST provides the grantor with some flexibility in how the trust is managed, including the ability to direct investment decisions, remove/re-appoint trustees, receive income from assets, and more. - Broad Asset Inclusion
A TIST can hold various types of assets, including cash, real estate, business interests, LLCs, and securities—making it a versatile tool in estate planning.
A TIST is another tool for clients to use during estate planning. While a TIST offers powerful benefits, it’s important to understand its limitations:
- The trust is irrevocable
- Assets may not always be removed from the grantor’s taxable estate
- It does not protect against existing obligations like past-due alimony or child support
- Protection applies only to future creditor claims
A Tennessee Investment Services Trust can be a strategic addition to an estate plan, especially for those with exposure to liability or long-term wealth preservation goals. When thoughtfully implemented, it helps safeguard assets while preserving control and flexibility.
Take Advantage of Tennessee’s Modern Trust Laws with Cumberland Trust
Tennessee’s modern trust laws offer unique advantages for individuals and families looking to preserve and protect their wealth—regardless of where they live. By appointing a Tennessee-based trustee, clients across the country can benefit from powerful planning tools like the Tennessee Investment Services Trust (TIST) and the Community Property Trust.
Why Choose Cumberland Trust?
At Cumberland Trust, we provide more than administration—we offer a partnership built on expertise, flexibility, and personalized service.
- Independent, Collaborative Approach
We work alongside your client’s existing advisors, adding strength–not disruption–to their wealth planning team. - Customized Trust Solutions
Every family is different. We tailor our trust administration services to your client’s specific goals, financial situation, and family dynamics. - Access to a Trust-Friendly Jurisdiction.
By working with a Tennessee trustee, your client can take full advantage of one of the most progressive and flexible trust environments in the country.
Whether your client is exploring asset protection or seeking tax-advantaged solutions, Cumberland Trust can support their trust and estate needs.
Contact us today to learn how we serve our clients whose estate plans may include TISTs and Community Property Trusts.