The notable Florida Community Property Trust Act was signed into law on July 1, 2021, and can have significant benefits for property-owning Florida residents. The Florida Community Property Trust Law allows couples domiciled in Florida to treat assets as “community property” by transferring them to a Community Property Trust (CPT). A CPT might be desirable for married couples who own highly appreciated assets. If you are interested in the benefits of the new Florida Community Property Trust Law, reach out to us at The Millman Law Group and read on to learn more about how this law may affect your assets.
What Is Community Property?
There are two legal marital systems in the US: separate property (or the common law system) and community property. Only nine states are completely using a community property system. However, Florida and five other states now permit couples to elect into a community property system using a Community Property Trust.
Without a CPT, when the first spouse dies, their assets would receive a step-up in basis to their date-of-death value. Any assets jointly owned would receive this step-up in basis for one-half of the value. The step-up in basis rule accounts for assets that have appreciated since they were first purchased.
How Does a Community Property Trust Work?
Previously, for any property held by a married couple as joint tenants or a tenancy by the entirety, the step-up in basis would be limited to 50% of the joint property.
Under the new law, if a couple creates and funds a Community Property Trust when the first spouse dies, all of the assets in the CPT will be revalued as of the date of that first spouse’s death. This is because assets in a CPT are considered assets of both spouses, regardless of how those assets are titled or which spouse bought them.
Imagine a husband and wife own stock with a cost basis (initial value) of $100 and a date-of-death value of $1,000. If this asset is in their Community Property Trust, when the husband dies, he leaves the stock to his wife, who now has a new basis in the stock equal to $1,000. She could turn around and sell the stock with no taxable gain.
Without a CPT, the husband dies, and his wife obtains a new basis in the stock equal only to $550. This represents the wife’s $50 share of the stock’s original basis ($100), plus the husband’s $500 share of the new, appreciated value of $1,000. In this situation, however, the wife would have a $450 taxable gain if she sells the stock.
Who Can Benefit from a CPT?
The primary benefit of using a CPT is that capital gains disappear. This adds flexibility for the surviving spouse, who can sell any of their assets in the trust without incurring sizable capital gains tax.
Additionally, a Florida Community Property Trust can provide significant income tax savings after the death of the first spouse for married couples with:
- The same intended beneficiaries
- Appreciated assets
- No creditor issues
However, a Community Property Trust is not a good choice if either spouse has creditor concerns because creditors can reach one-half of the assets held in a CPT.
It is essential to work with an experienced estate planning attorney who can properly advise you when creating your CPT. Contact The Millman Law Group today if you are eager to learn more about how the Florida Community Property Trust Law may impact you.
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