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
Directed trusts allow trust duties and responsibilities to be divided between a trust director and trustees. Michigan has had directed trust laws on our books since 2019, and now, through FUDTA, Florida has made directed trusts available for Florida planning.
A directed trust is a nice option for families that want the duties and liabilities related to managing their trust to be divided between different people or providers. Directed trusts are often used in the following types of scenarios:
- Allowing a trust director to direct a professional trustee in the trust’s investment management duties.
- Appointing a family member who has personal insight on trust beneficiaries as a trust director to direct discretionary distributions.
- Appointing a trust director who will direct a trustee on matters related to closely held family entities, including voting.
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.
Trusts 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
The CPTA provides some specific rules about how property in a community property trust is distributed in the event of a divorce or the death of a spouse, and these rules could save some wrangling in court later. But most folks are interested in the tax planning potential of a CPT.
In a community property state, when a spouse who owns community property dies, their 50% share of the property receives a tax cost basis “step-up” to fair market value. As an added bonus, the other spouse’s 50% share of the property also receives the step-up to market value as of the first spouse's date of death. If you have highly-appreciated assets, stepping up the basis for both spouses’ assets on that date 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 basis adjustment after the death of the first spouse, rather than just the adjustment 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 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).
