Joint Exempt Step-Up Trust (JEST) in Florida

A JEST is a joint revocable trust that produces a full basis step-up on all 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 JEST achieves a full step-up by giving each spouse a general power of appointment over the other’s share, pulling both halves into the deceased spouse’s gross estate.

The JEST also delivers creditor protection and next-spouse protection that a standard joint trust does not. After the first death, the credit shelter trust funded from both spouses’ assets becomes irrevocable. A creditor of the surviving spouse cannot reach those assets, and a second marriage does not expose them to a new spouse’s equitable distribution claim.

How the JEST Achieves a Full Basis Step-Up

A JEST uses reciprocal general powers of appointment to bring both spouses’ assets into the deceased spouse’s gross estate. In a standard joint trust, only the deceased spouse’s half qualifies for the step-up under IRC § 1014(a)(1). The surviving spouse’s half keeps its original basis, which means capital gains tax on any appreciation when those assets are eventually sold.

The JEST solves this by giving each spouse a general power of appointment over the other spouse’s share. When the first spouse dies, the surviving spouse’s share is included in the deceased spouse’s gross estate because the deceased spouse held a general power over it. The entire trust (not just the deceased spouse’s half) receives a new basis.

The IRS has addressed this structure in several private letter rulings and technical advice memorandums. PLR 200101021 and PLR 200210051 support the position that assets subject to a general power of appointment held by a decedent receive a stepped-up basis, even when the assets were originally contributed by the surviving spouse. Earlier TAMs from 1993 reached the same conclusion. These rulings are not binding precedent, and other taxpayers cannot cite them as authority, but they are the strongest federal guidance available for the JEST technique. The IRS has not issued any contrary guidance since.

The One-Year Rule Under § 1014(e)

IRC § 1014(e) prevents a step-up on appreciated property the decedent received as a gift within one year before death if the property passes back to the donor or the donor’s spouse. This means the JEST works best when the trust has been funded well before either spouse’s death.

A couple that funds a JEST five years before the first death has no § 1014(e) concern. A couple that funds it after one spouse receives a terminal diagnosis must account for the one-year rule. Assets contributed by the healthy spouse less than a year before the ill spouse’s death will not receive the step-up if those assets pass back to the healthy spouse through the credit shelter trust.

What Happens After the First Spouse’s Death

The JEST splits into two shares when the first spouse dies. The deceased spouse’s share funds a credit shelter trust (CST-A). The surviving spouse’s share either remains in a continuing trust or is distributed outright, depending on the trust’s terms.

The CST-A holds assets from both spouses: the deceased spouse’s original assets and the surviving spouse’s assets that were subject to the deceased spouse’s general power of appointment. All CST-A assets receive the basis step-up because they are treated as acquired from the decedent.

The surviving spouse can receive distributions from the CST-A for health, education, maintenance, and support. But the surviving spouse does not own the CST-A assets. This separation between beneficial use and legal ownership creates two distinct protections.

Creditor protection. The CST-A is irrevocable after the first death. A creditor of the surviving spouse cannot reach assets inside it because the surviving spouse is a beneficiary, not an owner. A spendthrift clause in the CST-A prevents creditors from attaching the surviving spouse’s beneficial interest. This protection does not exist in a standard joint trust, or in a TBE trust after the first spouse dies, since TBE protection dissolves at that point.

Next-spouse protection. If the surviving spouse remarries, the CST-A assets are not subject to equitable distribution in a subsequent divorce. The new spouse has no claim to assets held in an irrevocable trust funded before the second marriage. A standard joint trust that distributes assets outright to the surviving spouse offers no such protection.

How the JEST Compares to Other Joint Trust Structures

A standard joint revocable trust avoids probate and simplifies administration, but it provides only a half step-up at the first death and no creditor or next-spouse protection for the surviving spouse.

A TBE trust preserves tenancy by the entirety creditor protection while both spouses are alive, making it the strongest creditor protection option during the joint lifetime. A TBE trust provides only a half step-up at the first death, however, and TBE protection dissolves when the first spouse dies. After that point, the surviving spouse holds the assets without either TBE protection or the CST-A creditor protection a JEST would provide.

A Florida community property trust achieves the same full step-up as a JEST through community property treatment under IRC § 1014(b)(6). The CPT is simpler to draft and administer. But the CPT exposes each spouse’s half to that spouse’s individual creditors during life, and the IRS has not confirmed that Florida’s opt-in community property statute qualifies for the federal step-up under § 1014(b)(6). The JEST relies on the general power of appointment route, which has direct (if nonbinding) IRS support through the private letter rulings.

The JEST’s advantage over both alternatives is that it combines the full step-up with post-death creditor protection and next-spouse protection in a single structure. Its disadvantage is complexity: the drafting is more technical, the CST-A funding mechanics require precise language, and post-death administration is more involved.

Disadvantages and Limitations

A JEST requires more sophisticated drafting and administration than a standard joint trust or a community property trust.

Drafting Complexity

The trust agreement must create reciprocal general powers of appointment, define the CST-A funding formula, and coordinate with QTIP trust provisions if the estate plan uses a marital deduction trust alongside the credit shelter trust. Errors in the power of appointment language can produce unintended estate tax consequences or fail to achieve the step-up entirely.

IRS Uncertainty

PLR 200101021, PLR 200210051, and the 1993 TAMs support the JEST technique, but private letter rulings cannot be cited as precedent by other taxpayers. The IRS could change its position. No published revenue ruling or court decision directly addresses the JEST structure. Practitioners rely on the consistency of the IRS’s private guidance and the underlying statutory logic of IRC §§ 1014 and 2041.

No Creditor Protection While Both Spouses Are Alive

A JEST is a revocable trust while both spouses are alive. Either spouse can revoke their portion, which means a creditor of either spouse can reach the assets. Revocable trusts provide no creditor protection in Florida. The creditor protection advantage activates only after the first spouse’s death, when the CST-A becomes irrevocable. Couples who need creditor protection while both spouses are alive should hold those assets as tenants by the entirety or consider an offshore trust for liquid assets above the exemption thresholds.

Cost

A JEST costs more to draft than a standard joint trust or a CPT because the trust agreement is longer and more technical. Post-death administration also costs more because the trustee or trust administrator must understand the CST-A funding sequence and coordinate it with the estate tax return.

When a JEST Makes Sense

A JEST fits best when a married couple holds substantial appreciated assets, wants the full basis step-up at the first death, and values post-death creditor protection for the surviving spouse. The structure is most valuable when the surviving spouse is likely to hold assets for a long period, may face future litigation or creditor claims, or may remarry.

A couple whose primary concern is creditor protection while both spouses are alive is better served by TBE ownership or an offshore trust for liquid assets above the exemption thresholds. Most couples who use a JEST also hold other assets in structures that provide protection during both spouses’ lifetimes, since the JEST’s creditor shield only activates after the first death. A couple that wants a simpler path to the full step-up and is comfortable with the IRS uncertainty around opt-in community property may prefer a community property trust.

The question that distinguishes a JEST from these alternatives is whether the couple needs all three benefits (full step-up, post-death creditor protection, and next-spouse protection) in a single structure. No other joint trust delivers all three. The cost is higher drafting complexity and more involved post-death administration, which means the structure makes sense only when the appreciated assets and the surviving spouse’s risk profile justify the additional expense.