Community Property Opt-in & Directed Trust Laws
From: floridaestateplanning.com
In this whitepaper I’ll review two recently enacted Florida statutes that provide additional opportunities in your estate plans. I’ll also review one strategy to consider if you have adult children with highly appreciated property. The first statute affects married couples, The Florida Community Property Trust Act. The other new Florida law is for clients who want a professional trustee, but don’t want that trustee to change the custodian of your investments, whether that custodian is Schwab, E*TRADE, Vanguard, Fidelity or your current investment advisor. The final strategy that I will review is known as the Optimal Basis Increase Trust (OBIT).
Florida Community Property Trust Act (FCTA)
A benefit to taxpayers in community property states is the treatment of capital gains “step-up” at the death of a married individual. There are nine community property states in America: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin. Two United States territories also claim community property treatment: Puerto Rico, and Guam.
The step-up in tax cost basis is treated differently in the other 41 common law states than in the community property states.
Allow me to explain by example:
Sale of Appreciated Stocks and Properties While Both Married Individuals Alive
John and Jane Doe are married. They live in a common law, not a community property state. John dies. At the time of his death, John and Jane owned an investment account with stocks that have a combined fair market value of $1,000,000 at the time of John’s death, but a combined tax cost basis of $400,000. If they had sold off the entire account on the day before John’s death, they would have realized $600,000 of capital gain. If their marginal capital gains tax rate was 20%, then they would have paid $120,000 of federal capital gains income tax.
Sale of Appreciated Stocks and Properties After Death of First Spouse – Common Law State
Same facts as above. If John and Jane, common law state residents, retained the account in-tact until John’s death, and Jane sold off the entire account in the day after John’s death, the account received a one-half step up in tax cost basis. Consequently, the basis increased from $400,000 to $700,000 (unrealized gain of $600,000 at death receiving a one-half step-up, increasing the basis by $300,000).
