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 in a common law state, inherited assets receive a new basis equal to fair market value at death under IRC § 1014(a)(1). Only the deceased spouse’s half gets this adjustment. The surviving spouse keeps the original cost basis on their half.

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. If she sells, she owes zero capital gains tax. A $4 million portfolio with $3 million in built-in gains illustrates the scale. The full step-up can eliminate over $700,000 in federal capital gains tax.

Requirements Under Florida Law

Florida Statute § 736.1503 sets out the requirements for community property trusts. The trust must contain a statement in capital letters declaring it is a Florida community property trust. Both spouses must sign. At least one trustee must be a Florida resident or a qualified corporate trustee authorized to operate in Florida. The trust must include language describing the consequences of community property treatment, using the statutory form or equivalent.

Existing joint revocable trusts generally cannot be converted into a community property trust. A new trust must be created from scratch 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 the couple owns 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.

The Creditor Protection Tradeoff

Creditor protection is where the Florida community property trust differs most from tenancy by the entirety, and where Florida’s version differs from other states’ opt-in community property regimes.

Tenancy by the entirety protects jointly held marital assets from a creditor of either spouse individually. A creditor with a judgment against one spouse cannot reach TBE property at all. The protection fails only when both spouses owe the same debt.

A community property trust removes that shield. Each spouse owns a half-interest in the community property. A creditor of one spouse can reach that spouse’s half-interest in the trust assets.

Florida’s statute provides one advantage over traditional community property states and other opt-in jurisdictions like Alaska and South Dakota. In those states, a creditor of one spouse can typically reach the entire community property, not just the debtor spouse’s half. Florida’s CPT limits creditor access to the debtor spouse’s half only. This makes the Florida CPT a better creditor protection outcome than traditional community property, though still weaker than TBE.

The practical decision is straightforward. If a couple holds $3 million in appreciated stock and neither spouse faces significant 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 with personal guarantee liability, keeping those assets in TBE may be worth more than the tax savings.

The IRS Uncertainty

Florida’s Community Property Trust Act is clear in its intent. Federal tax treatment is not. 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.

Most practitioners and the Florida Bar committee that drafted the act believe the step-up will be respected. The legal argument is strong: federal tax law generally defers to state law when determining property rights. If Florida law says the assets are community property, the federal tax code should treat them as community property for basis purposes.

The risk is real but manageable. 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. Until that point, the couple retains flexibility.

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 for the contributed property. This provision prevents taxpayers from gifting appreciated assets to a dying spouse to obtain a quick step-up.

Comparing Trust Structures for Married Couples

The choice among a community property trust, a JEST, a TBE trust, and a standard joint trust depends on which combination of tax treatment, creditor protection, and estate planning flexibility matters most to the couple.

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 or JEST 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 significant individual creditor exposure, and a long time horizon before either spouse is likely to die. The assets most commonly placed in a CPT are appreciated stock portfolios, investment real estate with low basis, and closely held business interests.

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. The tax savings do not help if the assets are seized by a creditor before either spouse dies.

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—homestead, retirement accounts, insurance, and any offshore trust for high-risk liquid assets—operates independently.