Quick Read Summary (TLDR)

A Florida Community Property Trust (CPT), enacted in 2021, allows married couples to designate jointly held assets as community property, which offers a major federal tax benefit. This benefit is the “double step-up” in basis, which resets the cost basis of the entire asset (both spouses’ halves) to its fair market value upon the first spouse’s death. This step-up eliminates all capital gains tax on the asset’s appreciation if it is later sold by the surviving spouse, which is especially valuable for highly appreciated assets like real estate or business interests. Although there is some uncertainty regarding formal IRS guidance and a trade-off in asset creditor protection compared to “tenancy by the entirety,” the CPT represents a powerful estate planning tool for reducing potential capital gains tax liability.

If you are considering a CPT for your estate plan, know that there are important details that require experienced legal advice. Do not attempt to “go it alone.” Contact South Florida Law at (954) 900-8885 or reach out via our contact form.

What Is a Florida Community Property Trust?

Florida has long been a “separate property” state, meaning the way an asset is titled generally determines who owns it. That changed in 2021 when the Florida Community Property Trust Act took effect under Chapter 736, Part XV of the Florida Statutes (Sections 736.1501 through 736.1512). This law allows married couples to create a special trust that converts their jointly held assets into community property, opening the door to a powerful federal income tax benefit known as the “double step-up” in basis.

Nine states, including California, Texas, and Arizona, have traditionally followed community property rules. Florida now joins a smaller group of states that allow married couples to opt in to community property treatment through a trust.

Understanding the Step-Up in Basis

When someone sells an asset for more than the original purchase price, the profit is known as a capital gain, and taxes are owed on that gain. The original purchase price is referred to as the asset’s “basis.”

When a person passes away, the assets in that person’s estate receive a step-up in basis under Internal Revenue Code Section 1014. The tax basis resets to fair market value on the date of death, essentially wiping clean any appreciation that occurred during the owner’s lifetime.

However, in a separate property state like Florida, only the deceased spouse’s half of a jointly owned asset typically receives this step-up. The surviving spouse’s half retains the original basis, meaning capital gains tax may still be owed on the appreciation of their share.

How the Double Step-Up Works

Under community property rules, both halves of the asset receive a step-up in basis when the first spouse dies. This is the “double step-up” authorized by Internal Revenue Code Section 1014(b)(6).

For example, imagine a married couple purchased a business for $1 million, and it has grown to $8 million. Without a Community Property Trust, only the deceased spouse’s half receives a step-up to $4 million. The surviving spouse’s half still carries a basis of $500,000. Selling the entire business would create a taxable gain of $3.5 million.

With a properly funded Florida Community Property Trust, both halves receive a full step-up. The entire basis resets to $8 million, and a sale at that price results in zero capital gains tax.

Which Assets Benefit Most

A Florida Community Property Trust works best for assets with significant unrealized appreciation that the surviving spouse may want or need to sell. Common examples include taxable brokerage accounts, concentrated stock positions, investment real estate, closely held business interests, and valuable collectibles such as fine art.

Not all asset types benefit from being placed in a Florida Community Property Trust. Retirement accounts, qualified plans, income in respect of a decedent items, and life insurance policies do not receive a double step-up. Assets with minimal appreciation may not justify the added complexity. It is also worth noting that if an asset has decreased in value, placing it in a Community Property Trust could trigger a step-down in basis, increasing future tax liability rather than reducing it. For this reason, a selective approach is often the better strategy.

Working with an experienced Florida estate planning attorney is highly recommended when deciding which assets to include.

“Not all asset types benefit from being placed in a Florida Community Property Trust.”

Key Requirements and Considerations

Under the Florida Statutes, a Community Property Trust must include specific language declaring it as such, and that language must appear in capital letters at the beginning of the trust document. Both spouses must sign the agreement, and at least one trustee must be a Florida resident or a qualified corporate trustee authorized to operate in Florida. Existing joint revocable trusts generally cannot be converted. A new trust must be created from scratch.

One important trade-off involves creditor protection. In Florida, assets held as tenants by the entirety are generally shielded from the creditors of one individual spouse. Community property held in a trust does not enjoy that same protection. Many estate planning attorneys recommend balancing this risk by placing only highly appreciated assets into the Community Property Trust while keeping other assets titled as tenants by the entirety.

A Note About IRS Uncertainty

While the Florida statute is clear in its intent, the Internal Revenue Service has not yet issued formal guidance confirming that assets in an opt-in Community Property Trust qualify for the double step-up under federal law. Most legal commentators, including the committee of The Florida Bar that drafted the act, are optimistic that the trust will withstand scrutiny. The legal argument is strong because federal tax law generally defers to state law when determining property rights.

That said, the uncertainty is real, and it is highly recommended that married couples consult with a knowledgeable Florida attorney who can explain the risks based on their specific financial situation. If the IRS were to challenge the treatment, couples would generally be no worse off than if they had never created the trust.

The Importance of an Attorney

The Florida Community Property Trust Act represents a significant planning opportunity for married couples with appreciated assets. Whether the holdings include stocks, investment real estate, art collections, or business interests, the potential to eliminate or significantly reduce capital gains taxes through a full step-up in basis is a compelling reason to explore this strategy with an experienced Florida estate planning attorney.

South Florida Law

At South Florida Law, we offer an integrated approach to estate planning and probate, combining the personalized attention of a boutique firm with the comprehensive resources typically found at larger practices. Our firm’s estate planning and probate attorneys understand the complexities of Florida’s Community Property Trusts and can work closely with you to ensure that valuable protections are preserved for your family. If your family is considering a Florida Community Property Trust as part of an overall estate plan, contact South Florida Law for legal advice on (954) 900-8885 or by reaching out via our contact form.