How a Florida Community Property Trust Works: Step-Up and Divorce

A Florida community property trust is an elective trust, authorized by a 2021 state law, that lets a married couple reclassify jointly owned assets as community property so both halves may qualify for a stepped-up tax basis when the first spouse dies. The potential capital gains savings on appreciated property can be substantial. The catch: the IRS has never confirmed it will honor that step-up for trusts created under Florida’s opt-in framework.

Why Couples Use One

Florida is a common-law property state. Each spouse generally owns what they earn or buy, and when spouses hold an asset as joint tenants with right of survivorship, only the deceased spouse’s half receives a stepped-up basis at death. The survivor’s half keeps its original cost basis, so capital gains taxes still apply to any appreciation on that portion when the asset is sold.

A Florida Community Property Trust (CPT) reclassifies the transferred assets as community property. Under the statute, all property owned by the trust is treated as community property during the marriage, including any appreciation and income generated by that property.¹ Community property is eligible for a full basis step-up on both halves under federal tax law, if the IRS recognizes the arrangement. Couples who have held real estate or investment accounts through decades of appreciation stand to benefit the most.

How the Double Step-Up Works

Under federal tax law, property acquired from a decedent generally receives a new basis equal to its fair market value at the date of death. For community property specifically, the surviving spouse’s half also qualifies for this step-up, as long as at least half of the community interest was includible in the deceased spouse’s gross estate.²

A concrete example. A couple buys a home for $200,000 and it appreciates to $800,000 by the time one spouse dies. If they held it as joint tenants, only the deceased spouse’s half gets stepped up. The surviving spouse’s basis becomes $500,000 (the original $100,000 basis on their half plus the stepped-up $400,000 on the deceased’s half). Selling for $800,000 means $300,000 in taxable gains on the survivor’s half. Under community property treatment, both halves step up to $800,000 total, and the survivor can sell with zero capital gains.

For couples with heavily appreciated real estate, investment portfolios, or business interests, the difference can run to tens or hundreds of thousands in taxes.

The Unresolved IRS Question

This is the part that makes CPT planning uncomfortable. The IRS has never directly ruled on whether Florida’s community property trust qualifies for the double step-up under IRC Section 1014(b)(6). That provision applies to “community property held … under the community property laws of any State,” and the open question is whether Florida’s elective opt-in framework counts.

The concern traces to a 1944 Supreme Court decision, Commissioner v. Harmon, which held that Oklahoma’s elective community property system would not be recognized for federal income tax purposes. The Court drew a sharp distinction between states where community property is a mandatory legal consequence of marriage and states where spouses choose to opt in by agreement.³ The IRS Internal Revenue Manual reinforces the concern, stating that Harmon “should also apply to all elective community property systems” for income reporting purposes, specifically naming Alaska, South Dakota, and Tennessee.⁴ Florida’s system is newer but structurally similar. IRS Publication 555, which covers community property, explicitly declines to address elective community property laws.

Supporters argue that Harmon dealt with income splitting, not basis step-ups, and that the “community property laws of any State” language in Section 1014(b)(6) is broad enough to include elective systems. Several other states with similar trusts (Alaska, South Dakota, Tennessee, Kentucky) have operated on that assumption for years without a definitive IRS challenge. But “the IRS hasn’t said no yet” is a weaker foundation than most people realize when building a tax strategy around it. Anyone creating a CPT primarily for the step-up should understand this clearly and work with a tax professional who can evaluate their specific exposure.

What Florida Law Requires

The trust must expressly declare that it is a community property trust, include at least one qualified trustee, and be signed by both spouses following the same formalities required for executing any trust under Florida’s Trust Code.⁵ Both spouses can also serve as trustees alongside the qualified trustee.

A qualified trustee is either a natural person who lives in Florida or a company authorized to act as a trustee in the state.⁶ An out-of-state couple can create a Florida CPT, but they need a Florida-based trustee involved. Neither spouse has to be a Florida resident to transfer property in.¹

One requirement catches people off guard. The trust agreement must open with a specific warning in capital letters, alerting both spouses that the trust can affect creditor rights, spousal rights during marriage, divorce treatment, and inheritance outcomes. The statute essentially requires a built-in disclosure that each spouse should get independent legal advice before signing.⁵ Omitting this language could jeopardize the trust’s validity.

Spouses can transfer any or all of their property into the trust. Once property is distributed out, though, it loses its community property character.

Revocable or Irrevocable?

Contrary to what many summaries suggest, a Florida CPT is not automatically irrevocable. The spouses choose. The trust agreement can specify whether it is revocable or irrevocable, and if the agreement is silent, the default rule allows either spouse to amend or revoke.⁷ The trust only becomes irrevocable if the agreement explicitly says so.

Even in an irrevocable trust, the law builds in flexibility after a spouse dies. The surviving spouse can amend the trust as it relates to their own one-half share, regardless of the irrevocability provision.⁷ The deceased spouse’s half is administered according to the trust’s original terms.

Choosing between the two involves trade-offs. A revocable trust offers more flexibility but could raise questions about whether the community property classification is sufficiently permanent to satisfy IRS scrutiny. An irrevocable trust is harder to unwind but may present a stronger argument that the property has genuinely changed character. Given the unsettled federal tax landscape, this is worth working through carefully with an attorney and tax advisor.

What Happens at Divorce

Florida’s equitable distribution rules, which normally govern how marital assets are divided in divorce, do not apply to property held in a community property trust. Instead, the statute requires that upon dissolution of the marriage, the trust terminates and the trustee distributes one-half of the trust assets to each spouse.⁸ It is a strict 50/50 split, with no judicial discretion to adjust based on factors like earning capacity, length of marriage, or individual contributions.

Filing for divorce does not immediately terminate the trust. If the divorce action remains pending for 180 days, the trust automatically terminates and assets are distributed equally unless one of several exceptions applies: a spouse objects within the 180-day window, the court orders otherwise, the spouses agree in writing to keep the trust active, or the trust agreement itself provides a different rule.⁸

The mandatory 50/50 split departs significantly from how Florida normally handles divorce, where courts can weigh numerous factors and distribute assets unevenly when fairness demands it. If one spouse contributed substantially more to the property, or if the marriage is shaky, the rigid split could produce an outcome neither spouse would have accepted under standard equitable distribution.

How Creditor Exposure Changes

Moving assets into a CPT changes what creditors can reach. Under the statute, a debt incurred by one spouse alone can be satisfied from that spouse’s one-half share of the trust. Joint obligations incurred by both spouses during the marriage can be satisfied from the entire trust.⁹

The one-spouse-debt rule provides some protection: a creditor pursuing one spouse’s individual obligation cannot reach the other spouse’s half of the trust (unless the trust agreement allows a greater amount). But converting separately owned assets into community property means those assets are now potentially reachable by creditors of either spouse for joint debts. Property that was once shielded as separate can become exposed. Florida’s constitutional homestead protections still apply regardless of the trust structure.⁹

What Happens When a Spouse Dies

The trust doesn’t simply pass everything to the survivor. Each spouse holds a one-half interest in the aggregate value of the trust assets. The deceased spouse’s half is distributed or administered according to whatever the trust agreement says, which could direct it to the surviving spouse, children, or other beneficiaries. The surviving spouse retains their own half and can amend the trust’s terms regarding that share even if the trust was originally irrevocable.⁷

If the IRS does recognize the community property treatment, the full step-up on both halves takes effect at this point. The surviving spouse and any other beneficiaries receiving trust property would use the fair market value at the date of death as their new cost basis.² When property is later distributed out of the trust, it loses its community property character going forward.¹

Costs and Drafting

Attorney fees for drafting a community property trust typically range from a few thousand dollars to $10,000 or more, depending on the complexity of the estate and the assets being transferred. Real estate transfers add county recording fees. These costs are modest relative to the potential tax savings on a highly appreciated asset, but they sit alongside the ongoing requirement to maintain a qualified Florida trustee.

Because this area of law is only a few years old and the federal tax treatment remains unresolved, the quality of the drafting matters more than usual. A poorly drafted trust could fail to meet the statutory requirements, strip the property of its community property classification, or create ambiguity that triggers disputes after a spouse’s death. The statute itself warns in its required disclosure language that each spouse should seek independent legal counsel, and that advice is worth taking seriously.

1
Florida Legislature. Florida Code 736.1505 – Classification of Property
2
Office of the Law Revision Counsel. 26 USC 1014 – Basis of Property Acquired From a Decedent
3
Legal Information Institute. Commissioner of Internal Revenue v. Harmon
4
Internal Revenue Service. IRM 25.18.1 – Basic Principles of Community Property Law
5
Florida Senate. Florida Code 736.1503 – Requirements for Community Property Trust
6
Florida Senate. Florida Code 736.1502 – Definitions
7
Florida Legislature. Florida Code 736.1504 – Agreement Establishing Community Property Trust, Amendments and Revocation
8
Florida Senate. Florida Code 736.1508 – Dissolution of Marriage
9
Florida Legislature. Florida Code 736.1506 – Satisfaction of Obligations