United States: To Trust or Not to Trust — Florida's new statutes pave the way for expansion of individual’s succession planning opportunities

In brief

The Sunshine State has become an even more attractive option for establishing trusts and transferring wealth after the recent enactment of the Florida Uniform Directed Trust Act (FUDTA), and the Community Property Trust Act (CPTA). The Acts were enacted on 29 June 2021 and became effective on 01 July 2021. The Acts provide a clear mechanism for a trustee to delegate responsibility to a trust director and the ability to create a community property trust under Florida law. Taxpayers should carefully examine the new rules to determine how they could take advantage of the new Acts.


Contents

In more detail

The Sunshine State has become an even more attractive option for establishing trusts and transferring wealth after the recent enactment of the Florida Uniform Directed Trust Act, and the Community Property Trust Act. The Acts were enacted on 29 June 2021 and became effective on 01 July 2021. The Acts provide a clear mechanism for a trustee to delegate responsibility to a trust director and the ability to create a community property trust under Florida law. Taxpayers should carefully examine the new rules to determine how they could take advantage of the new Acts. Below, we provide an overview of the Acts and discuss planning considerations and opportunities.

1. Florida Uniform Directed Trust Act (FUDTA)

Following suit of other states such as Delaware and Wyoming, Florida has now codified the use of so-called “directed” trusts. Specifically, FUDTA allows a trust to grant power of direction to a “trust director” and limits the liabilities of the trustee for taking reasonable actions to comply with a direction from a trust director. The most common directed function is investment direction, but the trustee can also be directed as to other matters such as distributions to beneficiaries. Note that the FUDTA does not apply to certain powers provided by the trust, including a power of appointment, a power to remove a trustee or trust director, and the powers of a settlor over a revocable trust, such as the power to amend or revoke the trust.

Before the enactment of FUDTA, there was no clear mechanism to allow a trustee to truly delegate the responsibility of making such investment or distribution decisions. While trusts may have been drafted in such a manner, it is likely that any person who is delegated such powers would be considered a co-trustee; however, under the co-trustee arrangement, the delegating co-trustees still retain the legal responsibility to use reasonable care to ensure that the co-trustee exercising authority does so in accordance with its fiduciary duties, and the co-trustee is subject to the same fiduciary standards and potential liabilities as a trustee. FUDTA introduces significant changes that vastly improve the Florida Trust Code as FUDTA lays out the responsibility and liability of both the trust director and trustee and allows individuals beyond a trustee to be a trust director. Note that by default, under FUDTA, a trust director is subject to fiduciary duty in the exercise of the power of direction in the same manner as a trustee. However, the trust provisions can be drafted to reduce (or increase) the level of duty within reasons as the trust director is still subject to the good faith minimum duty no matter what the trust instrument says.

Those who are concerned that their current trust provisions may not adequately deal with their trust director, along with those who believe that they may benefit from the new Act, should consider revising their trusts to incorporate the new provisions. A directed trust can provide additional benefits, for example:

  • reducing trustee service fees because roles are limited accordingly, and
  • allowing non-trustees to take a more active role in the management of trust assets without unknowingly exposing themselves to fiduciary standards and liability that they do not necessarily understand.

2. Community Property Trust Act (CPTA)

The CPTA allows taxpayers to potentially take advantage of a huge tax benefit through the establishment of a community property trust. In short, under the CPTA, married couples can now “opt-in” to have property contributed to the trust treated as community property for all effects and purposes, with the added benefit that they do not have to reside in Florida to do so. From a U.S. tax planning perspective, the potential significant benefit for married couples to subject themselves to a community property regime is a result of Internal Revenue Code § 1014(b)(6), which provides that if a spouse dies owning community property, the deceased spouse's 50% share and the surviving spouse's 50% share of such property (i.e., 100%) obtain an adjustment to the property's historical tax basis equal to the fair market value on the date of death of the first spouse. If there has been significant appreciation in such community assets and/or there is a long period of time between the deaths of the spouses, this “double step-up in basis” can result in a tremendous tax benefit.

Notwithstanding the foregoing, before deciding to create a community property trust, the following should be considered:

  • The stability of the marriage. The plan would only be successful if the parties remain married, which can be difficult to predict even in a seemingly blissful long term marriage. Spouses should be especially wary if they are not confident about the prospects of their marriage, as transforming property to community property is effectively transferring 50% of the property to the other spouse, and this may modify the property rights that would have otherwise been applicable in the event of divorce.
  • Uncertainty. There is some uncertainty regarding how the Internal Revenue Service (IRS) will treat these arrangements where the property placed in the trust was not community property. For example, in Commissioner v. Harmon, 323 U.S. 44 (1944), the United States Supreme Court ruled that an Oklahoma statute that allowed couples to opt-in to a community property regime would not be recognized for federal income tax purposes. The IRS could argue that this precedent provides ammunition to attack these arrangements if they are viewed as abusive (or are being used to obtain a result not intended in the tax laws).
  • While commonly referred to as a basis “step-up,” if property depreciates, there is a risk of a downward adjustment to the community property's tax basis because the adjustment is to “fair market value.”
  • The U.S. federal gift tax implications of creating a community property trust. If both of the spouses are U.S. citizens, there should be no U.S. federal gift tax consequences when settling a community property trust as a result of the unlimited marital deduction. If one spouse is not a U.S. citizen, however, then the contribution of separate property by the other spouse would not qualify for the unlimited marital deduction benefit and could trigger a U.S. federal gift tax situation.
  • Possible Reduction in Creditor Protection. In Florida, spouses can hold property as tenants by the entirety (TBE), which can provide significant creditor protection benefits as the creditors of only one of the spouses (but not both) cannot attach property held in TBE ownership. If such assets were retitled as community property, however, a creditor of one of the spouses could reach 50% of the property.

To set up a community property trust in Florida under the CPTA, the trust is required to:

  • Include an express declaration. The trust instrument must declare the trust to be a community property trust.
  • Appoint a qualified trustee. At least one trustee must be natural person residing in Florida or a company authorized to act as trustee in Florida.
  • Properly execute the trust instrument. Both spouses must execute the trust with all the requisite formalities.
  • Include conspicuous language at the beginning of the trust instrument in substantially the same form set forth by the CPTA warning each spouse of the legal consequences of signing the agreement and urging the spouses to seek competent and independent legal advice if he or she has any questions about the trust agreement.

Overall, couples should consider placing their assets in a community property trust if migrating from community property states like Arizona, California, Idaho, Louisiana, New Mexico, Texas, Washington or Wisconsin or other community property jurisdictions, like in Latin America, where community property is a dominant regime. Couples who believe that they may benefit from the “double step-up in basis” should also consider the community property trust. If the property is not already community property as a result of the laws of another jurisdiction, however, one should carefully weigh the pros against the potential cons listed above before implementing such a trust.

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