Florida Creates “Community Property” Opportunity
Posted on September 27, 2021
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The Florida Community Property Trust Act, which was signed by Governor Ron DeSantis and went into effect July 1, 2021 continues to create a buzz in the legal profession as a potential boon to property owning residents. It allows couples domiciled in Florida to elect to treat property as “community property” by transferring it to a Community Property Trust (CPT). These trusts may be attractive to married couples who own highly appreciated assets and want to take the tax advantage of the full step-up in cost basis.
Florida has now joined Alaska, Tennessee, South Dakota and Kentucky to become the fifth state to provide its citizens with the opportunity to create Community Property Trusts.
Florida is a common law (or “separate property”) jurisdiction, which generally means that property titled in one spouse’s name is presumed to be that spouse’s own property. Alternately, in community property jurisdictions, any assets acquired during the marriage (with a few exceptions) are viewed as assets of both spouses regardless of how those assets are titled or which spouse bought them. There are currently nine “true” community property states and one state (Alaska) that has a modified version of community property law. A majority of countries outside the U.S. have community property laws.
Community property enjoys a significant income tax benefit because upon the death of the first spouse, federal laws provide that the cost basis of 100% of the community property is adjusted to the fair market value of the property as of the date of death (often referred to as the “step-up” in basis rule). In common law jurisdictions, only property included in the deceased spouse’s estate for estate tax purposes receives a basis adjustment. For property held by a married couple as joint tenants or a tenancy by the entirety, the basis adjustment is limited to 50% of the joint property. Thus, the tax burden on surviving spouses in community property jurisdictions is often much lower than that for surviving spouses residing in common law jurisdictions.
Long ago, Florida permitted residents to keep community property. Under the Uniform Disposition of Community Property Rights at Death Act, a married couple that moved to Florida owning community property from elsewhere could claim community property status when the first spouse died. The Uniform Disposition act, however, did not allow Florida residents to create community property on their Florida assets. The new act signed by DeSantis allows Florida assets to be put into a CPT.
There are certain requirements to creating a CPT. First, the trust must expressly state that it is a Florida Community Property Trust. Second, at least one trustee must either be a trustee located in Florida or a corporate trustee that has authority to act as a Florida trustee. Both spouses must sign the trust, and the trust must include special language that clearly spells out that the consequences of creating community property may be extensive.
These trusts do not come without risk. For example, some practitioners believe that because these trusts allow Florida residents to “opt-in” to community property, there is a risk that the IRS will challenge them in the future and attempt to limit the basis adjustment to only 50% of the trust’s property. Further, the creation of community property may expose the property to the creditors of both spouses. It is important to work with a competent estate planning attorney who can properly advise you prior to creating a Florida CPT.
If you are interested in creating a Community Property Trust, contact your Client Advocate so that The Trust Company can work with you and your attorney to determine if this is an appropriate tool for your estate plan. Contact Us with questions.
T. John Costello, Jr., J.D.
Senior Vice President, Fiduciary Services
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