As of July 1, 2021, the newly enacted Community Property Trust Act allows residents and nonresidents alike to establish a Florida community property trust. The tax law provides that residents of community property states receive a full basis step-up on their community property upon the death of the first member of a married couple to die.
In non-community property states, jointly held property owned by a married couple only receives a step-up (i.e., an adjustment of basis to fair market value as of the date of a decedent’s death) of one half of the appreciation in the assets. In other words, a surviving widow or widower in a community property state who inherits property from their deceased spouse might have no capital gain tax, while the same person in a non-community property state would have capital gains on the portion of the property, which did not get stepped-up.
Florida’s new law is an attempt to allow residents of a non-community property state to place themselves in a position to take the same tax advantage that the law offers to residents of community property states.
It provides that property owned by the trust would be deemed to be community property. To qualify, the trust must:
- Expressly state that it is a community property trust within the meaning of the law;
- Have a least one trustee who is a qualified trustee (a resident of FL or a FL trust company);
- Be signed by both spouses; and,
- Include cautionary language at the beginning of the trust document warning of the consequences of trust formation and encouraging the use of separate counsel for each spouse if either has questions.
Under Florida law, the creditors of one spouse could gain access to one half of the assets owned by the trust, so this may not be a good solution for people who have concerns about legal liability.
On the other hand, the new law expressly provides that on the first death, one-half of the assets must pass according to the deceased spouse’s wishes, so it might be a good solution for second marriages.
Also, the law provides that if the couple gets divorced, the community property trust status automatically terminates.
Several other states have already enacted such laws, including Alaska, Kentucky, South Dakota and Tennessee, but Florida is by far the most populous state to adopt a community property trust law. With only eight community property states, none of them are located in the east.