Florida Community Property Trust

Florida’s Community Property Trust Act, effective July 1, 2021, allows married couples to elect community property treatment for assets held in a qualifying trust. The primary benefit is a full basis step-up on both halves of the trust assets when the first spouse dies under IRC § 1014(b)(6). In a common law state like Florida, jointly owned assets normally receive a step-up on only the deceased spouse’s half.

The tradeoff is creditor protection. Assets held as tenancy by the entirety are immune from a creditor of one spouse. A community property trust exposes each spouse’s half to that spouse’s individual creditors. The decision turns on whether the tax savings on appreciated assets outweigh the loss of TBE creditor protection.

How the Basis Step-Up Works

When a spouse dies, the surviving spouse’s inherited half receives a new basis equal to fair market value at death. The surviving spouse’s own half keeps its original cost basis. This rule, codified in IRC § 1014(a)(1), means jointly owned assets in a common law state get only a 50% step-up.

A married couple who bought stock for $200,000 that is now worth $1 million illustrates the difference. If the husband dies and the stock was held jointly, the wife inherits his half with a stepped-up basis of $500,000. Her half keeps its original basis of $100,000. If she sells, she owes capital gains tax on $400,000.

If the same stock was held in a Florida community property trust, both halves receive a step-up to fair market value. The wife’s total basis becomes $1 million, and she owes zero capital gains tax on sale. A $4 million portfolio with $3 million in built-in gains can eliminate over $700,000 in federal capital gains tax at the long-term rate.

Which Assets Benefit

The full step-up applies only to assets whose basis matters at sale. Appreciated stock portfolios, investment real estate with low basis, and closely held business interests benefit the most.

Retirement accounts, qualified plans, IRAs, and life insurance do not benefit from a community property trust. These assets are taxed under their own rules—retirement distributions are taxed as ordinary income regardless of basis, and life insurance proceeds are already income-tax-free. Placing them in a CPT adds no tax advantage and may create unnecessary complications.

What Florida Law Requires

Both spouses must sign the trust agreement, and the trust must expressly declare itself a community property trust. Florida Statute § 736.1503 adds several more requirements. The trust must contain a declaration in capital letters at the beginning. At least one trustee must be a Florida resident or a qualified Florida corporate trustee. The trust must include statutory language describing the consequences of community property treatment.

A couple cannot convert an existing joint revocable trust into a community property trust. A new trust must be created and funded with the specific assets the couple wants treated as community property.

Both spouses must be alive when the trust is created. The trust applies only to assets contributed to it. Other assets retain their existing title and character. This selective approach allows couples to place only highly appreciated assets in the CPT while keeping other assets titled as tenancy by the entirety for creditor protection.

One structural consideration that practitioners frequently miss: out-of-state real property and tangible personal property located outside Florida may not qualify as community property under the Act or for purposes of § 1014(b)(6). Holding out-of-state real estate through a Florida LLC owned by the CPT increases the likelihood that the interest will be treated as community property, because the trust then holds an intangible membership interest rather than the real property directly.

The Creditor Protection Tradeoff

Florida’s community property trust removes the creditor shield that tenancy by the entirety provides. Under TBE, a creditor with a judgment against one spouse cannot reach jointly held marital property at all. A community property trust replaces TBE ownership with a half-and-half structure where each spouse’s interest is reachable by that spouse’s individual creditors.

Florida’s statute does limit the exposure more than traditional community property states. In states like California and Texas, a creditor of one spouse can typically reach the entire community property—not just the debtor spouse’s half. Alaska and South Dakota’s opt-in regimes have the same problem. Florida’s CPT limits creditor access to the debtor spouse’s half only under § 736.1505(2). A creditor of the husband can reach the husband’s 50% interest but not the wife’s. This makes Florida’s version a better creditor outcome than traditional community property, though still weaker than TBE.

The practical analysis depends on the couple’s exposure. If a couple holds $3 million in appreciated stock and neither spouse faces meaningful creditor risk, the CPT’s tax savings likely outweigh the reduced creditor protection. If one spouse is a physician with malpractice exposure or a business owner carrying personal guarantees, keeping assets in TBE may be worth more than the tax savings. A creditor who seizes the assets before either spouse dies eliminates the tax benefit entirely.

Will the IRS Respect the Step-Up?

The IRS has not issued formal guidance confirming that assets in an opt-in community property trust qualify for the full step-up under § 1014(b)(6). No court has ruled on the question for any opt-in state: Florida, Alaska, Tennessee, South Dakota, or Kentucky.

The legal argument in favor of the step-up is strong. Federal tax law generally defers to state law for determining property rights. Florida’s statute unequivocally classifies CPT assets as community property, and § 736.1511 explicitly provides that for purposes of § 1014(b)(6), a community property trust is a trust established under the community property laws of the state. If the property is community property under Florida law at the time of the decedent’s death, the statutory requirements of § 1014(b)(6) are met.

The most relevant precedent against the step-up is Commissioner v. Harmon, 323 U.S. 44 (1944), where the Supreme Court rejected Oklahoma’s elective community property law for income tax purposes. The Court emphasized the contractual nature of the election as inconsistent with true community property. But Harmon involved an income tax case, not basis adjustment, and predated both the Uniform Act and modern elective regimes.

In Murphy v. Commissioner, the Ninth Circuit clarified that community property character must exist at death for § 1014(b)(6) to apply. This favors Florida’s regime because the statute deems assets community property at death.

A 1993 IRS Field Service Advisory addressed community property brought from California to Oregon under Oregon’s version of the Uniform Act. The IRS respected the community property characterization in a common law state because state law preserved the property’s community nature. The reasoning supports opt-in regimes like Florida’s, though a Field Service Advisory is not binding authority.

The ABA Tax Section submitted a white paper to federal tax authorities requesting formal guidance confirming that opt-in community property trusts qualify for the double step-up. At the 2025 annual meeting, IRS representatives declined to provide formal guidance but indicated the issue is under active internal consideration. Until IRS rules or a court decides, the step-up remains an informed risk, not a guarantee.

The downside risk is limited. If the IRS later denies the step-up, the couple has not lost anything beyond the cost of creating the trust. The assets can be retitled back to TBE or other ownership. The position is not taken until a tax return is filed claiming the stepped-up basis after the first spouse’s death.

One additional timing concern: if one spouse contributes separate property to the CPT and the non-contributing spouse dies within one year, IRC § 1014(e) may limit the basis adjustment. This provision prevents taxpayers from gifting appreciated assets to a dying spouse to obtain a quick step-up.

Comparing Trust Structures for Married Couples

Florida married couples have several trust options depending on whether they prioritize tax treatment, creditor protection, or estate planning flexibility.

Feature	Community Property Trust	[JEST](/florida-asset-protection/jest-joint-exempt-step-up-trust/)	TBE Trust	Joint Trust
Basis step-up at first death	Full (both halves)	Full (both halves)	Half only	Half only
Creditor protection during life	Debtor’s half reachable	No protection (revocable)	Full TBE protection	No protection (revocable)
Creditor protection after first death	Surviving spouse’s half protected	CST-A assets protected from surviving spouse’s creditors	TBE dissolves at death	Depends on trust terms
IRS certainty on step-up	Untested for opt-in states	Supported by 1993 TAMs and 2001/2002 PLRs	Established	Established
Administrative complexity	Moderate (new trust, statutory formalities)	High (CST-A funding, QTIP coordination)	Low	Low
“Next spouse” protection	Depends on trust terms	Yes (CST-A assets irrevocable after first death)	No	Depends on trust terms
Estate tax planning	Standard marital/credit shelter	Full credit shelter trust funding from either spouse’s assets	Standard	Standard

A SLAT serves a different purpose. SLATs are irrevocable trusts that remove assets from the grantor’s estate while the beneficiary spouse retains access. They provide creditor protection during both spouses’ lifetimes under Florida’s 2022 amendment to § 736.0505(3). A CPT does not replace a SLAT; the structures solve different problems and can be used together.

When a Community Property Trust Makes Sense

The strongest case for a Florida CPT is a married couple with highly appreciated assets, no meaningful individual creditor exposure, and a long time horizon before either spouse is likely to die. Younger couples with normal life expectancies may see less benefit because appreciated assets are often sold and replaced over time, resetting the basis.

The weakest case is a couple where one spouse faces litigation risk, malpractice exposure, or business creditor claims. For those couples, TBE ownership provides asset protection that the CPT cannot match.

A common approach splits the difference. The couple keeps assets that need creditor protection in TBE. Assets with the largest built-in gains and lowest creditor risk go into the CPT. The rest of the Florida asset protection plan operates independently: homestead, retirement accounts, insurance, and any offshore trust for high-risk liquid assets.