A community property trust is a method by which some married couples can hold assets and enjoy tax advantages. In particular, a community property trust can benefit a surviving spouse from a tax perspective when the other spouse passes away. An estate planning attorney at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. can provide you with wide-ranging estate planning services, including developing a community property trust. We can help achieve all your estate planning goals.
The Florida Community Property Trust Act
The Florida governor signed the Community Property Trust Act into law on July 1, 2021. Under Florida Statutes § 736.1501 et seq., a married couple can transfer assets to a community property trust. The law treats the assets as community property as long as those assets remain in the trust.
Defining Community Property
All states have opted for a separate or community property system regarding marital property. Florida, like most other states, uses a separate marital property system. Nine states use a community property system approach to marital property. However, a few states, including Florida, now allow residents to opt into a community property system.
In states with separate property systems, property generally belongs exclusively to the spouse who acquired the property, although different laws may apply in a divorce proceeding. In contrast, in community property states, all property that either spouse acquires during the marriage belongs equally to both parties, no matter how it is titled. Therefore, upon divorce or death, each spouse is entitled to one-half of all community property (or the estate of a deceased spouse).
Furthermore, the character of the property is generally based on the law of the state in which the spouse acquires it. That character typically does not change if the couple later moves to a different state, even if the new state of residence has a different property classification system.
Benefits of a Community Property Trust
The major benefit of a community property trust is the federal tax advantage. Community property benefits from a “double basis step-up” at death. The property in the deceased spouse’s estate is assigned a new tax basis equal to the property’s fair market value. This new tax basis can be higher (basis step-up for appreciated property) or lower (basis step-down for depreciated property) than its basis. Even though only half of the community property is included in the deceased spouse’s estate, the entire property is assigned the new tax basis based on its fair market value.
The practical effect of this new tax basis for the surviving spouse inheriting the entire property is that capital gains disappear. As a result, the surviving spouse can sell trust assets without incurring capital gain tax provided the sales price is equal to date of death value
In contrast, if the spouses had simply owned the property jointly, outside of a community property trust, only the deceased spouse’s half of the property would receive a step-up in basis to its fair market value as of the date of death. As a result, the surviving spouse’s half of the property would not receive a step-in basis, so that spouse may incur capital gains tax if they need to sell the property.
Disadvantages of a Community Property Trust
The Community Property Trust Act requires that upon the death of the first spouse, one-half of the property must pass according to the deceased spouse’s wishes. The other one-half of the property must pass according to the wishes of the surviving spouse. The spouses may not have the same heirs in mind, especially in the case of second or subsequent marriages. Therefore, a community property trust may not be a good choice for these marriages.
Furthermore, if one spouse owes debts, creditors can reach that spouse’s half of any property held in a community property trust. Property in a community property trust still may be exempt under the homestead exemption. Still, other types of property may be reachable by creditors, at least to the extent of the debtor spouse’s half of the property. As a result, if one spouse has concerns about paying creditors, a community property trust may not be the wisest choice.
Call Us Today for Assistance with Your Estate Planning Needs
The estate planning lawyers at Kramer, Green, Zuckerman, Greene & Buchsbaum, P.A. provide comprehensive estate planning services so that we can minimize the need for probate proceedings in your estate and maximize tax savings. However, we also offer the full range of estate, probate, and related services when your loved one passes away.
We are here to help your family navigate the complex legal problems that often arise after losing a family member in the most efficient manner possible. Call us at (954) 966-2112 or find out more about our legal services online. Set up a time to talk to us about your legal needs today.