by Robin Cook,CWS®,CTFA
Sr.Vice President, and Prosperity Advisor, Suncoast Prosperity Advisors
The Florida Community Property Trust act (FLCPT) became available to married Florida couples on July 1, 2021. This trust provides many benefits, the most significant being the potential tax treatment of assets held in this type of trust after the first spouse passes away.
Florida is a common law property state, and asset ownership is dictated by how the asset is titled. If you own the asset, you may convey it.
Conversely, there are nine states that are community property states, and assets in those states that are acquired during a marriage are considered to be owned 50/50 regardless of how assets are titled or acquired. You can only convey the ½ that you own.
This new act, FLCPT, permits the creation of a joint Community Property Trust to permit spouses to place assets in the trust that will be treated as if the asset is Community Property.
The primary purpose of a Community Property Trust is to take advantage of Federal Income Tax Planning.
• Under IRS regulations, the property receives a “step-up in basis” on the death of the owner. A “step-up in basis” is a tax rule that adjusts the cost basis (price paid) of an inherited asset to its fair market value at the time of the decedent’s death.
• Jointly held property in a common law state only permits a “step up in basis” of ½ the property.
• Property held in a community property state, however, permits the survivor to a 100% “step up in basis” for all the property.
Let’s Look at an Example
| COMMON LAW | COMMUNITY PROPERTY |
|---|---|
| 200 Shares of ABC stock at $100 a share cost basis and a Fair Market Value of $500 owned. Jointly with rights of survivorship | 200 Shares of ABC stock at $100 with a share cost basis and Fair Market Value of $500 owned as Community Property |
| At Husband’s death ½ valued receives a step up in basis to $50,000 | At Husband’s death All shares valued at $500 |
| Wife owns ½ shares with a cost basis of $10,000 | Wife sells 200 shares $500/share netting $100,000 |
| Capital gain is $4,000 ($100,000-$50,000 - $10,000 = $40,000) | No capital gains. |
| Capital gains tax is $8,000 ($40,000 X 20%) | Tax savings $8,000 |
Are there downsides?
• You may lose creditor protection of Tenants by the Entireties.
• This may affect marital division in the event of a divorce.
• The IRS could challenge. No current case law or IRS regulations. The act is Florida law (not IRS Code or Regulation). Other states have taken similar actions, but this is not precedent.
As with all critical estate and tax planning strategy decisions, you should consult your wealth management team, including your wealth advisor, estate planning attorney, and accountant, before engaging in any transactions. It’s also an excellent time to check with your insurance agent to ensure that your umbrella liability policy is adequate.
Remember that these trusts are for specific assets and should not be a replacement for your will or trust.
If a Community Property Trust looks favorable, your attorney will draft the trust and assist with transferring assets into the trust name.
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