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Taxpayer-Friendly Trust Laws Are Florida's Latest Attraction

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What You Need to Know

  • Under the Uniform Directed Trust Act and Community Property Trust Act, Florida is even more hospitable to directed trusts or community property trusts.
  • Under FUDTA, clients have the authority to grant power over trust direction to a trust director.
  • The CPTA allows married people to create a Florida trust and elect community property treatment for all purposes.

During the pandemic, tens of thousands of Americans moved to Florida for lower taxes, warmer weather, and the prospect of keeping their high-paying jobs via remote work. Now, there’s yet another reason for clients to consider Florida: two attractive new options for establishing trusts and transferring wealth in a tax-preferred manner. 

The Florida Uniform Directed Trust Act (FUDTA) and Community Property Trust Act (CPTA) were effective beginning in July 2021. Clients interested in establishing a directed trust or community property trust should be advised that the Sunshine State just became even more friendly for these types of wealth transfer vehicles.

Florida Uniform Directed Trust Act

Florida law now formally recognizes “directed trusts,” falling in line with trust-friendly states such as Delaware and Wyoming. Under FUDTA, clients have authority to grant power over trust direction to a trust director. The law also limits liability for trustees who act in accordance with directions given by the trust director.

Typically, trust directors exercise investment direction over the trust assets. However, the trust document can also give the trust director authority to make other types of decisions, including decisions regarding beneficiary distributions. On the other hand, FUDTA does not change rules governing certain important decisions, such as the choice to remove a trustee or director, powers of appointment or power to revoke or amend the trust document.

Under prior law, trust creators did not have a formal option for trustees to delegate decisions regarding investments or distributions — meaning that if they delegated these responsibilities, the person making the decisions would typically be treated as a co-trustee (and that all co-trustees would still be responsible for ensuring that decisions were made in accordance with fiduciary obligations, regardless of who actually made the decision).

Trust directors under FUDTA are subject to certain obligations. For example, they must act in good faith and in accordance with the trust terms. However, the trust document can be drafted to control the level of responsibility.

The law can benefit clients for a number of reasons. It can allow non-trustees to actively participate in trust management and investment decisions without necessarily becoming exposed to fiduciary standards. It can also reduce the cost of trust administration, because if the trustee’s role is limited, the trustee can reduce fees.

Community Property Trust Act

The CPTA allows married individuals to create a Florida trust and elect community property treatment for all purposes. The clients do not have to claim Florida residency in order to create a community property trust.

Community property treatment can provide a valuable estate tax benefit. Under the IRC as written, each spouse’s 50% share of community property obtains a basis adjustment so that the property’s historical tax basis is adjusted to the fair market value of the property on the date of the first spouse’s death. This can allow these clients to achieve a double step-up in basis, which can be extremely valuable in the case of appreciated property.

Of course, clients must consider the potential consequences of these trusts. If the property depreciates, it’s possible that the basis will actually be “stepped down.” It’s also possible that some courts may not recognize this favorable tax treatment — and the IRC itself is always subject to amendment.

The implications of treatment as community property should also be considered. If the property is treated as community property, one spouse’s creditors can reach 50% of the other spouse’s property. In the case of divorce, each spouse will also be entitled to 50% of all community property.

Clients who are interested in setting up a Florida community property trust should ensure that the trust document expressly states that the trust is a community property trust and properly execute the trust document. The trust should also contain language explicitly informing the spouses of the consequences of executing the trust, as well as the need to seek independent legal counsel (the CPTA provides model language that can be used).

While the client need not reside in Florida, the trustee must be a Florida resident, or an entity authorized to act as a trustee in the state of Florida.

Conclusion

These new trust laws create a new measure of certainty for clients who wish to execute directed trusts or community property trusts in Florida. While the new provisions can be attractive for many, it’s important for the advisor to carefully evaluate the client’s unique situation when creating or reforming any trust vehicle.

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