The Florida Community Property Trust Act provides benefits to married couples by allowing them to have joint ownership of assets in a special trust. This can bring tax advantages when one spouse passes away. Before this act, joint ownership in Florida was more limited. In community property states, assets acquired during marriage are generally considered to be owned equally by both spouses, regardless of how they were acquired. The act allows spouses to choose community property treatment for assets held in the trust. This can have significant tax benefits. Other important considerations when using the trust include tax basis, the death of a spouse, homestead, creditors, business entities, gifts to spouse, nuptial agreements, and enforceability issues. Simply put, the government imposes a tax on the money you make from selling things. Your “basis” in something you buy is usually the amount you paid for it. If someone gives you something, your basis is what they originally paid for it. If you inherit something, your basis is the value of the item when the person died. If the value goes up, itâs called a âstep-upâ in basis. All of these things affect how much tax you owe when you sell something. When someone dies, the value of their property may change. If they owned the property with someone else, the change in value depends on how much the property was worth when they died. For example, if A and B own a property together and A dies first, B will get a higher value for the property. This means that if B sells the property later, they will pay less in taxes. When married couples own property together, there are special rules for how the property is treated when one spouse dies. If the property is owned as TBE (tenancy by the entirety) or JTWROS (joint tenants with right of survivorship), only half of the property is included in the deceased spouse’s estate. The surviving spouse will receive a basis adjustment on half of the property’s value. If the property is owned as community property, the surviving spouse generally receives a basis adjustment on the entire value of the property. This can affect how much tax the surviving spouse would owe if they sell the property after their spouse’s death. The Florida Community Property Trust Act allows spouses to create a special kind of trust that has tax benefits. To set up this trust, both spouses must sign a special agreement and follow certain rules. The trust can control how each spouseâs share of the property will be handled after they die. It can also save money on taxes for the surviving spouse. However, there are a lot of other things to consider before setting up this kind of trust, so itâs important to talk to a lawyer for advice. Before creating a Florida Community Property Trust (FLCPT), it’s important to consider the potential tax benefits. The IRS has not given clear guidance on whether it will allow assets in a FLCPT to receive a full basis adjustment. However, there is support for this treatment in common law property states. It’s important to consider the IRS risk and disclose it to spouses before using a FLCPT. Additionally, there are rules about basis adjustment if a spouse dies within one year of converting property to community property. It’s important to understand these rules before creating a FLCPT. According to tax law, if one spouse gifts half of a property to the other spouse, it will be included in the receiving spouse’s estate when they pass away. The giving spouse will also get a tax break on their half of the property. If the property has gone up in value, this can result in a higher tax basis for the giving spouse, which can be a good thing. If the receiving spouse lives for at least a year after the gift, the giving spouse will get a full tax break on their half of the property. When someone dies, their assets are included in their gross estate and taxed based on their value at the time of death. For assets like stocks, it’s easy to determine their value, but for things like real estate and privately owned businesses, it’s more complicated. If you own part of a property or business with someone else, the value of your share may be less than half of the total value, because a buyer would pay less for only part of the property or business. This is called a valuation discount.
When a spouse dies, their share of assets owned with their partner, like joint bank accounts or real estate, is included in their estate at half the value without any discounts. But when a spouse dies owning community property, the value included in their estate is based on their interest in the property.
For estate planning, valuation discounts can help reduce taxable estates and shift more value outside of the estate. When a spouse dies, you can choose whether to apply a valuation discount or a premium to their share of community property. Different factors, like taxes and creditor concerns, can influence this decision.
In general, if you own a 50/50 share of a business, you’ll get a discount because you have less control and the business is harder to sell in parts. But if you have a controlling interest, you may get a premium. For real estate, you may get a discount for the difficulty of selling your share and for the costs of splitting the property, but these discounts are usually smaller than for a business interest.
Understanding these rules is important if you want to get a higher basis adjustment for community property without discounts. In some community property states, there is a form of ownership called âcommunity property with rights of survivorshipâ that helps avoid probate and allows property to pass to the surviving spouse without going through the legal process. This type of ownership allows the property to keep its community property status, which can affect the tax basis of the property. In Florida, the instrument creating the ownership must include explicit language about the right of survivorship in order for it to be valid. By including this language in the agreement, the property will receive similar treatment as in other cases, with the surviving spouse receiving a full fair market value basis when one spouse dies. In Florida, when one spouse dies, their property automatically goes to the surviving spouse. This also protects the property from the individual debts of either spouse. However, spouses can choose to opt out of this rule. When someone dies, the value of their property for tax purposes is based on the value of the property at the time of their death. LLCs can choose how they want to be taxed, which affects how their property is valued for tax purposes. When someone dies, the value of all the stuff they owned at the time of their death is included in their estate. This includes property they owned with someone else, like their spouse. If the property was given as a gift to the spouse within a year of their death and then given back to the person who originally gave it, there won’t be a change in the value for tax purposes. When property is transferred between spouses, there’s no tax on any gain or loss, and the spouse who receives the property keeps the same value for tax purposes as the spouse who gave it. This doesn’t apply if one of the spouses is not a citizen. This is all based on the tax laws in the US, and there are state laws in Florida that also apply to how property is handled when someone dies. In Florida, to create a trust, the person making the trust must be capable, show an intention to create the trust, name who the trust is for, and the trustee must have responsibilities. If the trust has parts like a will, it has to be signed with the same rules as a will. Also, some states have special laws about how married couples can share property for tax purposes. There have been court cases about this too. Alaska and South Dakota have laws that allow married couples to share property equally, and these laws can affect how taxes are calculated after one spouse passes away. Some legal experts believe that these laws should also affect how the value of the property is determined at that time. Simply put, there is confusion about whether certain types of property arrangements will allow for a tax benefit called a step-up in basis. In some states, like Florida and Tennessee, it’s not clear if the benefit will apply to certain types of property ownership. In Alaska, the elective nature of the property regime raises questions about whether the tax benefit will be allowed. In South Dakota, depending on the situation, the tax benefit may not apply. Overall, it’s a complex issue with no simple answer. Basically, when a husband and wife own property together, they each have a share of it. If one of them dies, the value of their share can change for tax purposes. This can also happen if the property is stocks or other investments. There are specific rules for figuring out how much the property is worth for taxes when one of the owners dies. When a married person dies, the value of the assets they owned is adjusted for tax purposes. This can result in a lower value for the assets, which means less tax for the surviving spouse. There are rules about how much of a discount can be applied, and this can be a complicated issue. There is debate over whether certain types of ownership will provide the tax benefits people expect. This passage discusses a specific law (Treas. Reg. §25.2515-1(a)(3)) that applies to joint ownership between husband and wife in real property with the right of survivorship. It also mentions a case (Hirsch v. Bartels) and a Florida statute (Fla. Stat. §736.1505(3)) related to survivorship rights. The author, Joseph M. Percopo, is a lawyer who specializes in estate and trust planning, among other areas of law. This information is presented on behalf of the Real Property, Probate and Trust Law Section.
Source: https://www.floridabar.org/the-florida-bar-journal/understanding-the-new-florida-community-property-trust-part-i/
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