How Your Estate Can Take Advantage of the New Florida Community Property Trust Act
High net worth families located in Florida now have access to another tax shelter for their assets thanks to the Florida Community Property Trust Act.
Signed into law in July of 2021, this act shields your hard-earned wealth from unnecessary taxes – if you and your estate planning team decide to take advantage of it.
Florida is a common law state. That means assets purchased during a marriage remain solely the property of that individual. If a married couple purchases jointly, they each have one-half interest in the asset. This affects the way a step up in basis is calculated upon one spouses’ death. When you designate assets to this new type of trust, any assets within the trust receive a full step up in basis at the first spouse’s death.
Read on to find out why this act exists, what type of tax advantages and benefits can be expected from it, and how to know if it is right for you and your family.
Observe a Community Property Trust in Action
Let’s examine how one of these specialized trusts could save a family close to $1 million of their own wealth:
If Bill and Susan live in Florida and own $10 million in stock that they bought together 20 years ago for $1 million, they would earn a profit of $9 million should they sell it. At the highest tax rate of 20% – approximately $1.8 million would be due to the government in capital gains taxes. Note that in this situation, the “basis” – the original price of the asset which was used to calculate the profit on which they owed capital gains tax – is $1 million.
However, if Bill and Susan wait until after Bill dies to sell the asset, Bill’s one-half portion of the asset gets a step-up in basis on the day of his death. Now, the basis of his portion of the asset is half of the total, so $5 million. Susan’s basis of her portion is still $500,000. This makes the new basis $5.5 million. Should Susan eventually sell for $10 million – the fair market value the day Bill died – she now owes 20% federal capital gains tax on $4.5 million in profit. That is approximately $900,000 due to the government.
Now, if Bill and Susan had put that asset into a community property trust before Bill’s death, something different occurs: Bill’s interest in the asset and Susan’s interest in the asset both receive a step-up in basis upon Bill’s death to fair market value: $10 million. Should Susan or her heirs sell the stock after Bill’s death for that same amount, there would be $0 due to the government in capital gains tax.
Additionally, let’s say Susan has shares of Apple stock valued at $1 million that was originally purchased for $500,000. If she had put those assets into the trust, that stock would also receive a step-up in basis upon Bill’s death as well. Should she sell it after Bill’s death for $1 million, no capital gains tax would be owed, as opposed to realizing $500,000 in gains.
The Benefits of a Community Property Trust
A community property trust allows married couples to place select assets into a trust so that when the single economic unit of “Bill and Susan” dissolves due to either party’s death, all of the assets within that trust receive a full step up in basis since they are now owned by a new economic unit.
The largest benefit of utilizing a community property trust is that when one spouse dies, not only do the decedent’s assets get a full step up in basis, but any other assets within the trust will also receive a full step up in basis. This would include the surviving spouses’ assets, as well as any jointly held assets.
When utilizing a community property trust, you no longer have to plan for which spouse would, hypothetically, pass first. While you can anticipate overall health, you cannot anticipate accidents. The retitling of assets done in estate planning could have been done in vain, or it could save a lot of stress of trying to retitle assets when someone is about to pass away due to sickness. Instead, you can focus on comfort and time spent together.
Holding onto this portion of your wealth could make an enormous difference in the freedom of the surviving spouse, either to move closer to children, or to maintain the home they are currently in, to help future generations and causes financially, and to establish the best care for the surviving spouse should that become necessary.
Furthermore, a community property trust adds a greater level of certainty to estate planning. Often, estates are arranged based on an estimation of which spouse will pass first. This can leave significant assets hanging in the balance.
With a community property trust, you and your heirs can rest assured knowing how assets within the trust will be treated upon the death of you or your spouse.
When the outcome of these assets are more certain, you can also make more concrete plans for how much of your wealth you can pledge to the causes that matter most to you after your death.
Keep these Factors in Mind
Other states have enacted similar provisions – Alaska, Kentucky, South Dakota, and Tennessee in particular.
A cautionary word: the joining of property within a Community Property Trust could expose all assets within the Trust to any creditors attached to just one of those assets.
In addition, property transferred to a Community Property Trust could now be considered jointly held property in the event of a divorce. Therefore, these trusts are recommended for couples who have been in a long-term stable marriage for decades and have no children from a prior marriage.
While these trusts have not yet seen much in terms of court challenge, it is important to consult with an estate attorney who can help determine if one would be right for you and your family.
Take Steps Now to Safeguard Your Wealth in the Future
At Lindberg & Ripple, we work with high-net-worth families and their Trust & Estate Counsel to help them take advantage of all of the opportunities available to them to help safeguard their wealth and enhance their financial well-being.
To find out if our team of experienced professionals can assist you, you may contact us here.