Florida Community Property Trusts: Saving Tax and Avoiding Pitfalls
Florida Community Property Trusts can create meaningful income tax planning opportunities for married couples with highly appreciated assets. For lawyers, financial advisors, accountants, and other professionals who advise high-net-worth clients, they are worth understanding, especially as more clients move to Florida from community property jurisdictions.
The potential income tax savings can be significant. In the right situation, a Florida Community Property Trust may allow appreciated property to receive a step-up in basis on both halves of the property after the first spouse’s death. This is commonly referred to as a “double step-up in basis.”
But this planning is not simple. It can affect ownership rights, creditor protection, Florida homestead, marital agreements, trust funding, valuation, income tax reporting, and raises ethical issues for lawyers representing both spouses.
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For a more detailed look at Florida Community Property Trusts, including income tax examples, planning alternatives, creditor issues, homestead concerns, tax issues, drafting considerations, and ethical considerations, download the full presentation.
What is a Florida Community Property Trust?
A Florida Community Property Trust is a specialized joint trust established by a married couple. To qualify, it must meet the requirements of the Florida Community Property Trust Act.
Community property generally refers to the rights spouses have in property during marriage, at death, and in divorce. While the rules vary by jurisdiction, one concept is central: community property is a 50/50 arrangement. If the marriage ends by death or divorce, the community property trust assets are divided one-half to each spouse.
Florida is a common law state, but since 2021, married couples have been able to create community property through a Florida Community Property Trust.
Why this matters in Florida
Many married couples move to Florida from community property states such as California, Texas, Louisiana, Arizona, Washington, Wisconsin, New Mexico, Nevada, and Idaho. Many foreign jurisdictions also have community property systems.
When a couple brings community property to Florida, the legal and tax treatment may be different from what Florida advisors are used to. Title alone does not control ownership at death. An account titled in one spouse’s name will be treated as one-half owned by the deceased spouse’s estate and one-half owned by the surviving spouse if the account is community property or traceable to community property.
That matters when advising clients on gifts, trust funding, asset protection, basis planning, and estate administration.
The main opportunity: income tax savings
The primary reason to consider a Florida Community Property Trust is potential income tax savings for the surviving spouse.
Under community property tax rules, one-half of the trust property is included in the gross estate of the first spouse to die. However, both halves of appreciated community property may receive a step-up in basis under Internal Revenue Code Section 1014(b)(6).
Consider a married couple that starts a business with a combined basis in their shares of $1 million. The business later grows to a value of $8 million. If one spouse dies and the surviving spouse sells the business, only the deceased spouse’s half would receive a step-up in basis without community property planning. The surviving spouse could still have a $3.5 million capital gain.
If the business shares were owned by a Florida Community Property Trust, both halves may receive a step-up in basis. In that example, the surviving spouse could potentially sell the business with no capital gain.
Florida homestead can also be a strong use case. For an older married couple in a stable marriage with a highly appreciated Florida homestead, the potential savings can be significant, especially if the surviving spouse may sell, downsize, or move after the first spouse’s death. In the presentation example, a $5 million homestead with a $1 million basis could create potential tax savings of approximately $500,000.
The key pitfalls
Florida Community Property Trusts are not right for every couple. They may not be appropriate for younger couples with long life expectancies, couples with unstable marriages, clients whose primary goal is creditor protection, or a non-citizen spouse.
They also require careful planning around several important issues:
- Creditor protection. A Florida Community Property Trust is not an asset protection trust. Joint creditor claims may reach all trust assets, and a creditor of one spouse may be able to reach that spouse’s one-half interest. Florida homestead remains protected, but other assets are likely subject to claims.
- 50/50 property rights. Clients must understand that community property is divided one-half to each spouse at death or divorce. This can significantly change the couple’s property rights.
- Loss property. The double step-up can become a step-down if the trust owns assets with a basis higher than fair market value. Built-in loss property generally should not be held in a Florida Community Property Trust.
- Deathbed planning. If a trust is funded shortly before one spouse dies, Internal Revenue Code Section 1014(e) may limit the intended basis adjustment, depending on the facts.
- Non-pro rata funding. The Florida Community Property Trust Act allows flexibility in dividing assets after the first spouse’s death, but allocating assets non-pro rata may create tax risk if Section 1014(b)(6) is analyzed on an asset-by-asset basis.
- Florida homestead. Homestead may be one of the best assets for this planning, but it is also one of the most complicated. Florida homestead devise limitations, minor child issues, waiver agreements, and post-death allocation all need to be considered.
- IRS uncertainty. There is no direct IRS authority confirming the intended federal income tax treatment of Florida Community Property Trusts. The strategy may work as intended, but clients should understand the uncertainty.
Why coordination matters
This is not a one-size fits all strategy. A Florida Community Property Trust should be evaluated with the client’s overall estate plan, asset protection goals, tax planning goals, and family circumstances.
For lawyers representing both spouses, these trusts raise issues under the rules of professional conduct. The spouses must be aligned, fully informed, and in many cases should receive the same level of disclosure and documentation used in postnuptial agreement planning.
Coordination with advisors is especially important. The client’s tax advisor should be comfortable with the trust agreement and funding, record keeping, tax analysis, and reporting to the IRS after the assets are sold.
A powerful tool, but a specialized one
Florida Community Property Trusts can be highly effective in the right circumstances. They may provide substantial income tax savings for a surviving spouse, particularly when a married couple owns highly appreciated assets and a sale after the first death is likely.
But the potential tax benefit should not be viewed in isolation. The planning must be weighed against potential creditor issues, changes to marital property rights, complications of planning with Florida homestead, cost of compliance, and IRS uncertainty.
The question is not simply whether a Florida Community Property Trust may produce a double step-up in basis.
The better question is whether the potential tax savings justify the complexity, risk, and tradeoffs for that particular couple.
