Dean Mead’s Tax Department handles tax planning issues for businesses and individuals. The attorneys in our department have extensive experience in a full range of…
In Florida, many clients and their attorneys do not consider the effect of community property laws on estate planning or estate and trust administrations. Many clients come to Florida from other states and countries in which they have acquired community property. These clients, and their attorneys, need to identify any community property and carefully consider whether it is advantageous to retain its character as community property, how best to do so and how it will be distributed after their deaths.
Several states, including Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin, recognize community property. Brazil, Chile, China, Costa Rica, Denmark, France, Italy, Mexico, Netherlands, Philippines, Russia, South Africa, Spain, Sweden, Switzerland and Ukraine recognize some form of community property. Cuba was a community property country prior to communist rule.
Florida, like most states, recognizes that the community property of new residents generally retains its character unless the owners take some action inconsistent with the community property nature of the property. In Florida, the income of, proceeds from and property received in exchange for, community property is presumed to be community property.
Recognition of Community Property in Florida
Nearly half a century ago, Florida courts characterized assets purchased in Florida with the proceeds from assets a couple acquired while domiciled in a community property jurisdiction (Cuba) as community property. de Quintana v. de Ordono, 195 So.2d 577 (Fla. 3rd DCA 1967). In 1992, Florida enacted the Florida Uniform Disposition of Community Property Rights at Death Act (the “Act”). Laws 1992, c. 92-200, §4. The Act subsequently was amended on several occasions.
Application of the Act
The Act applies to (i) personal property, wherever located, which (a) was acquired as or became community property under the laws of another jurisdiction, (b) was acquired with the income of, proceeds from, or in exchange for, community property, or (c) is traceable to such community property and (ii) real property located in Florida, except real property held as tenants by the entirety property, which was (a) acquired with the income of, proceeds from, or in exchange for, property acquired as or which became community property under the laws of another jurisdiction or (b) is traceable to such community property. F.S. §732.217.
The Act creates a couple of rebuttable presumptions. The Act is presumed to apply to property acquired by either spouse during a marriage while domiciled in a jurisdiction under whose laws property could be acquired as community property. The Act is presumed not to apply to (i) real property located in Florida and (ii) personal property wherever located acquired by either spouse while domiciled in a jurisdiction under whose laws property could not be acquired as community property and title to which was taken in a form which created rights of survivorship. F.S. §732.218.
If the Act applies to property, then upon the death of the first spouse (i) one-half (1/2) of such property belongs to the surviving spouse and is not subject to testamentary disposition by the deceased spouse or distribution under the laws of intestacy and (ii) one-half (1/2) of such property is the property of the decedent and is subject to testamentary disposition or distribution under the laws of intestate succession. The decedent’s one-half of such property is not included in the elective estate. F.S. §732.219.
Perfection of Title Under the Act
Many times, title to property to which the Act applies will be held in the name of one spouse or both spouses with a right of survivorship. Thus, after the death of the first spouse, nominal title to the property may appear to be held by either the estate of the deceased spouse or the surviving spouse. The Act provides mechanisms for either the personal representative (or a beneficiary) or the surviving spouse to perfect title to the interest of the estate or surviving spouse, respectively, in such property. The personal representative is under no duty, however, to determine whether the Act applies to any property held by the surviving spouse unless a demand is made by either (i) a beneficiary within three months after service of the notice of administration or (ii) a creditor within three months after first publication of the notice to creditors. F.S. §732.221. The personal representative is under no duty to determine whether the Act applies to any property held by the decedent unless a demand is made by the surviving spouse within three months after service of the notice of administration. F.S. §732.223.
Protection of Purchasers Under the Act
The Act protects purchasers for value of, and lenders who take a security interest in, property subject to the Act. A purchaser for value or lender taking a security interest in property in which the surviving spouse or the personal representative (or a beneficiary) has apparent title takes the interest in the property free of any rights of the personal representative (or a beneficiary) or the surviving spouse, respectively. The proceeds from a sale of, or creation of a security interest in, community property are treated as property subject to the Act. F.S. §732.222. Such proceeds are subject to the rights of the personal representative (or beneficiary) or the surviving spouse.
Actions That Terminate Community Property Attribute
The Act allows a married couple to sever or alter their interests in community property subject to the Act. The reinvestment of any property subject to the Act in real property which is or becomes homestead property creates a conclusive presumption that the couple has agreed to terminate the community property attribute of the property reinvested. F.S. §732.225. For purposes of the Act, “homestead” refers only to homestead property the descent and devise of which is restricted by the Florida Constitution. F.S. §732.227.
Whether you are a couple who moves to Florida from a community property jurisdiction, or an attorney doing estate planning for the couple, you must consider the effect of the Act. Some considerations are:
1. Although joint trusts are not common in Florida, they are commonly used in community property jurisdictions. Well meaning, but uninformed, financial and legal advisors might recommend that a couple terminate a joint trust and divide the ownership of the assets between the spouses and hold each spouse’s share of the assets in a separate account in the name of the spouse or his or her newly created revocable trust in an effort to insure that each spouse can utilize the maximum amount of his or her estate tax applicable exclusion amount. Such action could be interpreted as severing the community property attribute of the assets so divided.
2. Consideration should be given to retaining community property in a joint trust so that the existing community property and the income of, proceeds from and property received in exchange for such community property remains easily identifiable.
3. Even in community property jurisdictions, each spouse often owns separate property. Joint trusts drafted in community property jurisdictions generally provide for the segregation of each spouse’s separate property. Many clients do not do a good job of keeping their separate property segregated and easily identifiable while living in a community property jurisdiction. Great care should be taken to segregate separate property acquired after moving to Florida, e.g., earned income, gifts from third parties, inheritances from third parties, etc., and consideration should be given to the creation of separate revocable trusts to hold each spouse’s separate property.
4. Most methods by which spouses might acquire title to a principal residence in Florida, whether in an individual name or jointly, will terminate the community property attribute of the assets used to acquire the residence. If one spouse acquires the residence in his or her name such that it becomes homestead property, then there is a conclusive (i.e., irrebuttable) presumption that the couple agreed to terminate the community property attribute of the property used to acquire the residence. If the couple acquires the residence in their joint names, as tenants in common, then the property would be homestead as to each spouse’s interest and the same presumption would apply. If the couple acquires the residence in their joint names, as tenants by the entirety, the property is specifically excluded from the application of the Act. It appears that a couple could acquire title to their principal residence as joint tenants with right of survivorship without creating the conclusive presumption that they terminated the community property attribute of the assets used to acquire the residence. The residence would not be subject to the restrictions on descent and devise imposed by the Florida Constitution, because when the first spouse dies, title would pass to the surviving spouse by operation of law. Unlike property held as tenants by the entirety, however, property held as joint tenants with right of survivorship is not specifically excluded from the application of the Act.
5. One of the greatest potential benefits of community property occurs at the death of the first spouse. Under federal estate tax law, if property is not community property, then in a common law jurisdiction such as Florida, the income tax basis of a deceased spouse’s individually owned assets and one-half of assets owned jointly with the surviving spouse generally are adjusted to their value as of the date of death. If property is community property, however, then the income tax basis of both spouse’s interests in the community property are adjusted to their value as of the date of death. It has traditionally been presumed, and historically been true, that the adjustment of basis to the value as of the date of death would result in a step-up in the basis. The step-up would be beneficial in that the amount of gain realized on the future taxable disposition of the asset would be reduced. In recent years, however, the adjustment in basis often has resulted in a step-down or reduction of the income tax basis of many assets.
New Florida residents who have lived in community property jurisdictions, and estate planning attorneys who represent them, should (i) identify community property, (ii) decide whether to preserve the community property attribute and how to do so and (iii) consider the effect of re-titling assets. Personal representatives, beneficiaries and surviving spouses of decedent’s who owned community property, and the attorneys who represent them, should (i) identify potential community property, (ii) determine whether the couple previously terminated the community property attribute, (iii) decide whether action should be taken to perfect title to such property and (iv) consider the effect of the adjustment in the basis of the interests of both spouses in community property.