For married couples residing in Florida, estate planning often involves revocable living trusts. A relatively novel and strategic tool gaining attention is the Florida Community Property Trust (CPT). A CPT is a joint revocable trust that may be created by married couples under the Community Property Trust Act of the Florida Statutes.  This vehicle is designed to emulate the benefits of community property treatment —particularly the double step-up in basis at the first spouse’s death — even in Florida, a common law (non-community property) state. However, this technique involves a calculated trade-off, particularly the potential loss of asset protection for non-homestead property placed in the trust.

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This article examines the CPT’s primary benefit — stepped-up basis advantages — and contrasts it with its main drawback — diminished asset protection. Florida couples considering such a trust must understand these issues to determine whether a CPT fits within their estate planning and asset protection strategies.

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I.         Community Property and the Step-Up in Basis

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The Step-Up in Basis: A Primer.  The step-up in basis is a tax provision under section §1014 of the Internal Revenue Code (IRC) that adjusts the cost basis of property to its fair market value (FMV) at the owner's death. In common law states like Florida, assets held by spouses or as tenants by the entirety (TBE) typically receive a step-up only on the decedent’s half of the property. The surviving spouse retains his or her original basis for their half.  In contrast, community property states allow for a 100% step-up in basis upon the first spouse’s death — even for jointly owned property — reducing or eliminating capital gains tax on a subsequent sale by the survivor.

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How CPTs Emulate Community Property Treatment.  Florida, by default, does not recognize community property. However, spouses can elect to treat property as community property in a revocable trust via a CPT. This is possible under the Community Property Trust Act under the Florida statutes because IRC §1014(b)(6) allows for 100% step-up treatment for “community property” owned at death if the property was held as such under the laws of any state.  This declaration is intended to support a full step-up in basis on all assets in the trust at the first spouse’s death.

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II.   Benefits of the Florida CPT

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Full Step-Up in Basis at First Death.  This is the most powerful advantage of the CPT. Assets within the trust may receive a full step-up in basis to fair market value upon the first spouse’s death. The higher basis reduces the value of unrealized gains that could otherwise be taxed if the property is sold by the survivor. For example:  A couple owns rental real estate with an adjusted basis of $500,000 and FMV of $1.5 million.  If held as TBE in Florida, only the decedent’s half (i.e., $750,000) would be stepped up.  The surviving spouse would retain a $250,000 basis in their half, and post-sale, could owe significant capital gains taxes.  If, instead, the property is held in a CPT with community property designation, the full $1.5 million value becomes the new basis, eliminating potential capital gains on sale immediately following the death of the first spouse.

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Basis Planning and Income Tax Efficiency.  The full basis adjustment also allows the surviving spouse to depreciate income-producing property (i.e., rental real estate) from a higher basis, thus enhancing post-death income tax efficiency.

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III. Drawbacks of the Florida CPT

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TBE and Florida Asset Protection: A Primer.  In Florida, property owned by spouses as TBE enjoys a high degree of creditor protection. A creditor of only one spouse generally cannot reach TBE property. This applies to jointly titled bank accounts, real estate, and other jointly owned assets.

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Transfer into a CPT Destroys TBE Status.  The formation of a CPT requires retitling assets into the name of the trust. Once this occurs, the ownership is no longer considered TBE — even if both spouses are co-trustees and beneficiaries. As a result, assets in the trust may become reachable by the creditors of a single spouse.  This is particularly concerning for non-homestead real estate, rental property, and investment accounts.  If a spouse is subject to a lawsuit or creditor claim, these trust assets may be exposed.

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Florida Homestead Considerations.  If a married couple contributes their homestead to a CPT, the homestead retains constitutional protections from creditors even when held in a revocable trust, provided the trust is properly drafted and maintained. However, non-homestead property, such as vacation homes or investment real estate, does not enjoy this protection and is at greater risk once placed in the CPT.

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Divorce Considerations.  Assets contributed to a CPT are converted to community property.  The CPT provides that, in the event of divorce, all assets of the CPT are distributed equally to the spouses.  Therefore, spouses should consider whether non-joint assets (i.e., assets in the name of one spouse) should be contributed to a CPT, as the contributing spouse would be irrevocably contributing one-half ownership of such property to the other spouse.

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Recognition by IRS.  The Community Property Trust Act is enacted in the Florida Statutes.  The IRS has not definitively stated its position on such trusts, particularly regarding the step-up in basis.  Despite the lack of guidance from the IRS, there is support for the assets of the CPT to receive a full step-up in basis.  If the above drawbacks can be overcome, then a married couple is in no worse position by placing property into the CPT: if the full step-up in basis is successfully challenged by the IRS, then the couple would be in the same position as not having contributed the property to the CPT.

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IV. Planning Considerations and Trade-Offs. 

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The decision to use a CPT involves balancing income tax efficiency against creditor risk:

 

Consideration                         CPT Benefit                                               CPT Drawback

 

Step-Up in Basis                                            Full basis step-up at first death                                         Not yet addressed by IRS

 

Income Tax Savings                                    Reduced or eliminated capital gains                              Not yet addressed by IRS

 

Asset Protection                                           Loses TBE protection on non-homestead                   Creditor exposure increases

                                                                            non-homestead property

 

Estate Planning Simplicity                       Unified trust for both spouses                                            Potential complexity if reversed later,

                                                                                                                                                                                    event of divorce

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One potential solution is to use a hybrid structure, where only select high-gain, low-risk assets (such as marketable securities) are placed into the CPT to gain basis benefits, while higher-risk assets (like rental real estate) remain outside the trust in TBE form. Another is to combine the CPT with umbrella liability insurance or an LLC for liability-prone assets.

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V. Conclusion 

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The Florida Community Property Trust is an innovative estate planning tool offering significant income tax advantages through a full step-up in basis. However, it also involves the sacrifice of asset protection, particularly for non-homestead property that would otherwise be safeguarded under TBE ownership. For many Florida couples, the decision to use a CPT will depend on their risk tolerance, asset composition, and tax priorities. This could be a very attractive planning tool for older individuals in a long-term marriage, whose home has highly appreciated since it was purchased many years ago. Thoughtful structuring and professional guidance are essential to optimize its benefits while managing the risks.

 

Disclaimer: This article is for educational purposes only and does not constitute legal or tax advice. Please contact our office to consult with a qualified attorney before implementing any estate planning strategy.