On July 1, 2021, two new acts affecting trusts were in enacted in Florida, the Florida Uniform Directed Trust Act and the Florida Community Property Trust Act. While both of these Acts are targeted in nature, they could provide an excellent planning opportunity for those with the right situation. Below are the highlights of these new laws.
Florida Uniform Directed Trust Act
The Florida Uniform Directed Trust Act essentially gives the grantor of a trust the ability to divide up the trustee’s responsibilities and powers between the trustee and another individual, whom the Act refers to as a “trust director”. This new Act could be a helpful tool for a grantor that needs management of a unique asset, such as a closely held business interest or real property, or discretionary distributions for a beneficiary in certain circumstances (e.g., minor beneficiary or a beneficiary that has dependency issues) and the desired trustee is unable or unwilling to provide those services given the unique asset or the beneficiary’s needs. Under the Act, the trust director could be given the power to instruct the trustee on how to act in those circumstances. The trustee who must follow the directions of the trust director will have their liability limited accordingly, and the trust director would take on that liability as well as be held to the same fiduciary duty as the trustee.
Florida Community Property Trust Act
The Florida Community Property Trust Act makes Florida the 5th state to enact such legislation. The states are divided into community property states (of which there are nine) and common law states (of which there are forty-one). One of the advantages a married couple receives in a community property state is that on the first spouse’s death, appreciated community property receives a full step up in basis. By comparison, on the first spouse’s death in a common law state such appreciated jointly owned property will only receive a step up in basis in half of the assets. In essence, this new Act provides a way to re-characterize assets from a common law state so that they receive community property treatment for tax purposes.
The Act would allow for the creation of a trust (“Community Property Trust”) with the intention that property held in such trust would receive a full step up in basis on the death of the first spouse. This could allow the surviving spouse to sell such asset without incurring capital gains tax on the appreciation that occurred prior to the deceased spouse’s death.
One potential downside is that assets transferred to a Community Property Trust could cause that property to be reachable by either spouses’ creditors. This would not be a good opportunity for someone who may have creditor issues or has a career in which they have a high risk of being sued. Those that would be best able to take advantage of the Act would be couples in a stable, long term marriage with highly appreciated property who do not have any creditor concerns.
There is the suggestion of some uncertainty regarding the effectiveness of Community Property Trusts. While the first common law property state to enact legislation allowing a Community Property Trust did so in 1998, there are still no rulings or cases where the IRS has either challenged or blessed this method to get a full step up in basis.
If you are interested in either of the above techniques, we encourage you to reach out to your estate planning attorney. In the event you do not have an estate planning attorney, we are happy to make a referral.
By Erin Bunnell, J.D., LL.M.
Vice President & Private Wealth Advisor, Trust
Articles In This Issue:
2021 Fourth Quarter Review and Commentary
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