Unlocking the Step-Up: Florida’s Community Property Trust Act and the Double Basis Opportunity

The enactment of the Florida Community Property Trust Act (FLCPT Act) in 2021 marked a significant development for married couples seeking income tax planning opportunities in a common law jurisdiction. While estate tax exposure has become less common due to historically high federal exemption amounts, capital gains tax remains an ever-present concern—especially for couples holding highly appreciated assets such as real estate, closely held businesses, or investment portfolios. The FLCPT offers Florida practitioners a planning tool once thought to be exclusive to community property jurisdictions: a full step-up in basis under Internal Revenue Code § 1014(b)(6).

But with opportunity comes uncertainty. Despite the state statute’s clear intent, the federal tax consequences—specifically whether assets held in a Florida Community Property Trust (FLCPT) qualify for a double step-up in basis—remain untested by the IRS. This article explores the legal landscape of community property trusts in Florida, evaluates the federal income tax implications, and offers practical guidance for practitioners navigating this evolving terrain.

The Basics: Community vs. Common Law Property

In community property jurisdictions, most property acquired during marriage is deemed jointly owned by both spouses, regardless of title. This contrasts with common law jurisdictions like Florida, where property ownership depends primarily on title and source of funds. The critical federal income tax distinction arises at death: under IRC § 1014(b)(6), both halves of community property—whether titled in one or both names receive a step-up in basis
to fair market value. In contrast, in common law states, only the decedent’s share receives this step-up.

Historically, this double step-up conferred a clear tax advantage on residents of community property states. Recognizing this disparity, several states including Alaska, Tennessee, and now Florida have enacted “opt-in” regimes allowing residents to elect community property treatment via a trust instrument.

Florida’s Community Property Trust Act

Florida Statutes §§ 736.1501–736.1512 set forth the requirements for creating a valid FLCPT. A qualifying trust must:

• Be signed by both spouses;
• Include specific cautionary language at the beginning of the trust;
• Expressly declare itself a community property trust; and
• Have at least one qualified trustee (who may also be one of the settlors).

Upon funding the trust with marital assets,
the property is characterized as community property under Florida law. Notably, § 736.1511 explicitly provides that, for purposes of applying IRC § 1014(b)(6), a community property trust is considered a trust established under the community property laws of the state.

Despite this statutory language, there remains no IRS guidance directly confirming that an FLCPT results in a double basis adjustment at the death of the first spouse. This silence leaves practitioners and clients in a legal gray area—tempted by the prospect of significant tax savings but aware of the potential risks.

The Federal Tax Question: Will the IRS Respect It?

Section 1014(b)(6) provides that a surviving spouse’s one-half share of community property held with the decedent “under the community property laws of any State” receives a step-up in basis. The ambiguity centers on whether an “opt-in” regime like Florida’s qualifies as a community property law for this purpose.

The strongest argument in favor of full step-up is grounded in state law. As a general principle of tax law, state law defines property rights, and federal law determines their tax consequences. Florida’s statute unequivocally classifies trust assets as community property and does so using language closely mirroring § 1014(b)(6). By this logic, if the property is community property under Florida law at the time of the decedent’s death, the statutory requirements of § 1014(b)(6) should be satisfied.

Support can also be found in a 1993 IRS Field Service Advisory involving Oregon’s version of the Uniform Disposition of Community Property Rights at Death Act. There, the IRS respected community property characterization in a common law state because the state law preserved the property’s community nature. While not binding, the reasoning is instructive.

Nevertheless, no court has yet ruled definitively on the tax treatment of FLCPTs. The IRS could argue that elective community property systems—like Florida’s—lack the historical pedigree or legal infrastructure to confer community property status for federal tax purposes. The U.S. Supreme Court in Commissioner v. Harmon, 323 U.S. 44 (1944), rejected an Oklahoma elective community property law for income tax purposes, emphasizing the contractual nature of the election as inconsistent with true community property.

But Harmon involved an income tax case—not basis adjustment—and predated both the Uniform Act and modern elective regimes. In Murphy v. Commissioner, the Ninth Circuit clarified that community property character must exist at death—not merely at some point in the past—for § 1014(b)(6) to apply. This could favor Florida’s regime, which specifically deems assets community property at death.

Call for Guidance

In one of its recent White Paper submitted to federal tax authorities, the Tax Section requested guidance confirming that community property trusts established under the laws of “opt-in” states such as Florida qualify for the double basis adjustment under IRC § 1014(b)(6). During the 2025 Annual Meeting in Washington, D.C., representatives of the Tax Section met with officials from the IRS and the Treasury Department to discuss the submitted White Papers. While the IRS declined to provide formal guidance, anecdotal indications suggest that the issue is under active internal consideration.

Notably, the IRS did not address the fundamental question of whether any community property trust statute—regardless of the state—satisfies the statutory definition of “community property” for federal tax purposes. However, IRS attorneys did identify a number of peripheral issues that could impact the federal treatment of such trusts. These included the residency of the settlors, beneficiaries, and trustees; the situs and character of the trust assets; and whether planning strategies such as converting real property to intangible property affect the trust’s classification.

Until such formal guidance arrives, the prudent approach is full disclosure. Advisors recommending FLCPTs should document the risks and explain the IRS’ silence. Some clients may choose to proceed based on the legal rationale and state statute, while others may prefer more settled strategies. Either way, the conversation must be informed and transparent.

Practical Considerations and Risks

In practice, many clients may find the benefits of an FLCPT compelling. A full basis step-up can eliminate capital gains on appreciated assets, enabling a surviving spouse to sell real estate or liquidate a portfolio without immediate tax consequences. This is particularly impactful for long-held, low-basis assets like family vacation homes or small business interests.

However, advisors should weigh several considerations:

1. IRS Risk: There is an opportunity cost with creating a FLCPT – a client is giving up the chance to take other steps that would achieve results similar to a FLCPT, and, until the IRS issues formal guidance or a court upholds an FLCPT’s treatment, there remains a risk that the IRS could deny the step-up. For some clients, this may be an unacceptable risk.

2. Creditor and Divorce Implications: Community property status can alter creditor exposure and rights in divorce. While FLCPTs offer creditor protection similar to revocable trusts, practitioners must consider the implications for both spouses’ rights.

3. Homestead Issues: Florida’s constitutional protections for homestead property are preserved in an FLCPT, provided the surviving spouse retains rent-free use and enjoyment for life. Failure to structure the trust accordingly could result in reassessment and loss of tax benefits.

4. Devisability Limits: If homestead property is directed to someone other than the surviving spouse (or held in further trust), Florida’s restrictions on testamentary disposition may invalidate the transfer. Proper waiver language—whether in the deed or a nuptial agreement—is essential.

5. Elective Share Uncertainty: Florida Statute § 736.1507 provides that, upon the death of a spouse, one-half of the value of the property in the trust reflects the share of the decedent spouse and is subject to testamentary of disposition. The statute goes on to state that “the decedent’s spouse’s one-half share” is not included in the elective estate, but the statute is silent on the decedent’s one-half share. In contrast, under Florida’s Uniform Disposition of Community Property Rights at Death Act, in § 732.219, the decedent’s one-half share is not includable in the elective estate.

Conclusion

6. The Florida Community Property Trust Act

offers an innovative tool for Florida-based tax and estate planners. By replicating a key advantage of community property states, the FLCPT can provide substantial income tax savings through a full basis adjustment at death. Yet the lack of definitive federal guidance means this area remains unsettled. Practitioners must balance creativity with caution—helping clients understand the legal framework, potential benefits, and unresolved risks that accompany this powerful but still-developing planning technique. As debates continue in Washington and litigation looms as a possible path to resolution, Florida is no longer an observer in the community property conversation—it is now part of the dialogue shaping its future.

© 2025 This article was originally published in the Summer 2025 issue of the Tax Section Bulletin, a Florida Bar Tax Section publication.

The information provided in this article does not, and is not intended to, constitute legal advice; it is for general informational purposes only. No reader of this article should act or refrain from acting on the basis of this information without first seeking legal advice from counsel in the relevant jurisdiction to ensure the information contained herein – and your interpretation of it – is applicable or appropriate to your particular situation.

Jones Foster attorney Richard C. Vaughan concentrates his practice in estate planning, trust and estate administration, business planning, and transactional corporate law. Richard develops comprehensive estate plans for individuals and families to efficiently preserve their assets, including the use of revocable and irrevocable trusts. He is experienced in creating and maintaining corporate structures within the context of a client’s estate
plan, including drafting operating agreements, buy-sell agreements, entity restructuring, and related agreements among shareholders and partners. Richard holds an LL.M. in Estate Planning from the University of Miami School of Law.

Jones Foster attorney Alexander M. Parthemer focuses his practice in the areas of estate planning, probate and trust administration, tax planning, business planning, and transactional corporate law. Alex works with individual clients and families to develop personalized estate plans for asset protection and distribution while minimizing estate, gift, and generation-skipping transfer (GST) tax impact. His background in complex tax planning uniquely positions him to represent business owners and family offices in a wide range of corporate matters. Alex holds an LL.M. in Taxation from the University of Florida Levin College of Law.