Tampa Bay Business & Wealth Magazine – April 2022
Married and Own Property? You May Be Able to Take Advantage of Florida’s New Community Property Trust Act
By: Erica K. Smith Roodhouse
On July 1, 2021, while Floridians languished in the continued COVID pandemic and the summer humidity, it may have been easy to miss the enactment of Florida’s Community Property Trust Act. Under the Act, a married couple can convert Florida common-law property into community property by using the common-law property to fund a community property trust. This new law is similar to elective community property laws already passed in Alaska, Tennessee, South Dakota, and Kentucky.
Benefits of the Act
The allure of the new Act is greatest to married couples who own significantly appreciated assets. When a married couple owns common-law property and one spouse dies, the portion of the property that belonged to the deceased spouse is includable in the deceased spouse’s gross estate for estate tax purposes, and the value of the deceased spouse’s property receives a new basis equal to the fair market value on the date of the deceased spouse’s death. When a married couple owns community property and one spouse dies, one-half of the total value of the community property is includable in the deceased spouse’s gross estate for estate tax purposes, and both the deceased spouse’s one-half interest and the surviving spouse’s one-half interest in the community property receive a new basis equal to the fair market value of the property at the date of death of the deceased spouse. If the couple owns highly appreciated assets, the income tax consequences of a single step-up in basis versus a double step-up in basis at the death of the first spouse could be significant.
Despite the potential income tax benefits, a Florida community property trust is not the right choice for all married couples with Florida property. Before you rush to create a Florida community property trust under the Act or advise your clients to do so, please consider the following four points:
Aspects of the Act for Consideration
First, a married couple that has converted common-law property previously owned as joint tenants with right of survivorship or as tenants by the entireties to community property forfeits the survivorship otherwise characteristic of the asset because one-half of the value of the property held in a community property trust reflects the share of the decedent spouse and is subject to disposition under that spouse’s estate plan or distribution under the laws of intestate succession.
Second, a community property trust may be distasteful to a married couple when one spouse has brought significantly more assets to the marriage than the other spouse. When a married couple owns community property in a Florida community property trust and then divorces, the trustee must distribute one half of the property to each spouse, without the opportunity for the spouses to reach their own agreements or for a court to divide the assets fairly, but unequally.
Third, if a married couple has asset protection as a primary goal of their estate planning, it may be more advisable for them to own property as tenants by the entireties (which protects the property from the debts of just one of the spouses) than it is to hold the same property within a community property trust (which allows a debt incurred by one of the spouses to be satisfied from that spouse’s share of community property).
Fourth, it remains unclear whether the IRS will recognize the community property status of assets in a Florida community property trust for purposes of the double step-up in basis. So far, the IRS has specifically declined to address the federal tax treatment of income or property that a married couple has elected to transform from common-law property into community property. Although the IRS’s silence, rather than objection, may be a good sign, it is possible that Florida community property trusts may raise eyebrows in the IRS because of the unique refusal of the Florida Community Property Trust Act to make 100% of the assets in a community property trust available to creditors of just one of the spouses.
Obviously, the decision to convert joint or tenants by the entireties property to community property using a Florida community property trust is not one to be undertaken lightly. In the right circumstances, however, the drafters of the Act hope that married couples can reap the income tax benefits of transforming their highly appreciated common-law property to community property.
Erica K. Smith Roodhouse is an attorney in Trenam Law’s Private Client Services Group. She can be reached at firstname.lastname@example.org.