Community property means that all property acquired between spouses during a marriage will be presumed to be owned as an undividable 1/2 interest by each spouse. This is an important concept for asset protection, divorce, and estate planning issues. With many former California and Oregon residents moving to Florida due to high state and local income tax rates (over 13% in some parts of California and almost 10% in parts of Oregon), community property discussions are becoming more common.
Florida is not a community property state. The community property states (and territories) are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas (by constitution so you cannot reclassify property), Washington, Wisconsin, and Puerto Rico. Minnesota has tried four times to become a community property state, but the ballot measure failed all four times. Tennessee, Kentucky, Alaska, South Dakota and as July 1, 2021, Florida, allow you to opt-in for community property treatment. The opt-in could be by title or by trust depending upon the jurisdiction.
Florida has created the Florida Community Trust Act under Florida Statute 736.1501. This new law allows Florida residents who are married to create a trust, in which the trust assets are treated as community property. Assets that are not placed into the trust would continue to be presumed as tenants by the entireties unless otherwise designated. Both spouses must agree in writing to create a Community Property Trust. This new trust option should be appealing to any married couple who own a highly appreciated asset with a low-income tax basis.
Assets that are held as Community Property have two advantages. First, each spouse earns 1/2 of any income generated by the trust asset(s). Second, and this is the big advantage, the surviving spouse gets a step-up in basis on the entire value of the asset upon the first spouse’s death. Pursuant to past controversies from other states, in the event of an IRS audit, it is still possible for a spouse to seek innocent spouse relief.
There are a few disadvantages of using a new Florida Community Property Trust. First, the trust offers no creditor protection between spouses. Therefore, a married couple would have to be very careful that this trust does not violate the terms of any pre-nuptial or post-nuptial agreement. Second, the Florida version of the law is untested for income tax or creditor purposes, although Tennessee has had a similar law in effect for the last twelve years, and Kentucky for the last two years. Lastly, the Trust would dictate an equal split of the assets in the event of a divorce and a 100% distribution of assets to the surviving spouse upon the death of the first spouse.
In Florida, it is allowable to retain community property status if a married couple moves to Florida from a community property state. Assets that are intended to be held in such fashion should be titled as community property in the actual account title.