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 under IRC § 1014(b)(6) on both halves of the trust assets when the first spouse dies. 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. Under this rule, codified in IRC § 1014(a)(1), jointly owned assets in a common law state get only a 50% step-up.

A married couple bought stock for $200,000 that is now worth $1 million. 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. The $400,000 of taxable gain in the joint example sits entirely on her own half.

Which Assets Benefit

The full step-up helps only assets that would otherwise be sold at a taxable gain. 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. 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

Florida’s community property trust statute sets four requirements.

• The agreement must declare expressly that the trust is a community property trust.
• Both spouses must sign it with the formalities the Florida Trust Code requires.
• At least one trustee must be a Florida resident or a company authorized to act as a trustee in the state.
• The agreement must open with the capital-letter warning in § 736.1503, which tells both spouses that the trust changes their exposure to creditors and their rights against each other.

A couple with an existing joint revocable trust does not have to start over. The statute counts a trust as a community property trust if it meets the four requirements and was created, amended, restated, or modified on or after July 1, 2021. Florida added the amendment and restatement route in 2025 and made it apply to trusts signed before then.

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. A couple can place only highly appreciated assets in the CPT and keep other assets titled as tenancy by the entirety for creditor protection.

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 makes it more likely 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. A judgment against one spouse alone does not reach an asset the spouses own as tenants by the entirety. A community property trust replaces that ownership with a half-and-half structure. Each spouse’s half is reachable by that spouse’s own creditors.

Florida’s statute limits the exposure more than a classic community property state does. Under § 736.1506, a creditor collecting a debt that one spouse incurred alone can reach that spouse’s one-half share of the trust and no part of the other spouse’s half, unless the trust agreement exposes a greater amount. In California, the whole community estate answers for a debt either spouse incurred before or during the marriage.

The half-share rule yields to the constitutional homestead protection. Under § 736.151, a home keeps its homestead character inside a community property trust as long as it would qualify if a spouse held title individually. Even so, exposing half of everything else is weaker than entireties titling. Entireties property has two limits of its own. A judgment against both spouses reaches it, and so does a federal tax lien against either one.

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.

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 classifies CPT assets as community property. Section 736.1511 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 said the contractual nature of the election was inconsistent with true community property. But Harmon was an income tax case rather than a basis case, and it predated every modern elective community property regime.

In Murphy v. Commissioner, 342 F.2d 356 (9th Cir. 1965), the Ninth Circuit held that § 1014(b)(6) reaches only property the spouses still held as community property when one of them died. That favors the Florida CPT, because Florida law treats the assets as community property up to the moment of death.

Until the IRS issues guidance or a court decides the question, a couple claiming the full step-up is taking an informed risk.

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 moved back to TBE or other ownership. Entireties titling of a financial account means opening a new account, because an existing account cannot be retitled into entireties. The position is not taken until a tax return is filed claiming the stepped-up basis after the first spouse’s death.

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	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 is an irrevocable trust that moves assets out of the grantor’s estate while the beneficiary spouse keeps access to them. Florida’s 2022 amendment to § 736.0505(3) governs what happens after the beneficiary spouse dies, treating the trust assets as contributed by that spouse rather than by the grantor. A community property trust does not replace a SLAT. A couple can use both.

When a Community Property Trust Makes Sense

The strongest case for a Florida CPT is a married couple with highly appreciated assets and no meaningful individual creditor exposure. 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.