Recent Florida legislation has created some new planning opportunities through the Florida Uniform Directed Trust Act (FUDTA) and the Community Property Trust Act (CPTA), both of which were effective July 1, 2021.
New Planning Opportunities With FUDTA
Through FUDTA, Florida has made directed trusts available for Florida planning. This a nice planning option for families that want the duties and liabilities related to managing their trust to be divided between a trust director and trustees. Directed trusts are often used to appoint a trust director:
- To direct a professional trustee in the trust’s investment management duties.
- To direct a trustee on matters related to closely held family entities, including voting.
- To direct discretionary distributions (this trust director is often a family member with personal insight on trust beneficiaries).
This division of responsibilities can limit liability for trustees and trust directors, hopefully encouraging people to agree to serve in these roles for the family. This division of responsibilities also can allow for more economical administration of trusts.
Highlights of FUDTA Include:
- A trust may appoint a “trust director” (a person with the power to direct) to give instructions to a directed trustee. The trust director is subject to the same fiduciary duty and liability as a trustee would have.
- A trust’s “principal place of administration” can be Florida if a trust director is a resident of Florida or has their “principal place of business” in Florida.
- Trusts can be drafted to spell out the powers, fiduciary duties and liability for trust directors and directed trustees.
- Any actions against a trust director have a six-month statute of limitations, and a directed trustee has limited liability for taking reasonable actions to carry out a trust director’s direction.
New Planning Opportunities With CPTA
While Florida is not a community property state, the CPTA essentially allows couples to opt into a community property situation by creating a community property trust (CPT) and treating property that is transferred to the trust as community property. Spouses do not need to be domiciled in Florida to create a community property trust, and the statutes apply to irrevocable and revocable trusts.
A trust must meet several requirements under the CPTA, including that it must have at least one “qualified trustee” - a person living in Florida or a company that has authority to act as a trustee in Florida.
Tax Benefits of Community Property
Estate planners are interested in the tax planning potential a CPT could offer from utilizing community property rules. In a community property state, both halves of the community property owned by the spouses receive a cost basis “step up” from the original value of the property to its fair market value on the date of the first spouse’s death. This step up in basis would wipe out the capital gains incurred on both spouses’ assets up to the date of the death of the first spouse.
This step-up in basis for the remaining spouse’s assets can save a significant amount in taxes over what would typically be owed in a separate property state like Florida or Michigan, where only the deceased spouse’s assets receive the step-up in basis at their death.
Estate planners are hoping that even though Florida is not a community property state, creating a CPT in Florida will allow the assets in the trust to receive the full step-up in basis after the death of the first spouse, rather than just the step-up for the deceased spouse’s assets.
Potential Drawbacks of Creating a CPT
If this sounds too good to be true, it might be. It is yet uncertain how the IRS will treat a double step-up in basis claim for property in a Florida CPT, since the trust was settled in a non-community property state. The IRS has previously challenged issues related to creating community property in non-community property states.
Warner has attorneys who are licensed in both Michigan and Florida and who regularly handle Florida estate and tax planning. If you would like to learn more about planning options under FUDTA or CPTA, please contact your Warner attorney or contact Karen Kayes at kkayes@wnj.com (231.727.2619), Jennifer Remondino at jremondino@wnj.com (616.396.3243) or James Steffel at jsteffel@wnj.com (231.727.2621).
