Understanding the New Florida Community Property Trust.

• Author: Percopo, Joseph M.
• Position: Part 2

A Florida Community Property Trust (FLCPT) is a joint trust that holds the assets of a married couple, and, while both spouses are alive, the assets generally may be used for their benefit. Upon the death of a spouse, even if the FLCPT is irrevocable, "the surviving spouse may amend a community property trust regarding the disposition of that spouse's one-half share of the community property." (1) F.S. [section]736.1507 provides that "[u]pon the death of a spouse, one-half of the aggregate value of the property held in a community property trust established by the settlor spouses reflects the share of the surviving spouse" and "[t]he other one-half of the value of that property reflects the share of the decedent spouse." (2) Unless the FLCPT agreement provides otherwise, the trustee has the power to divide the assets in any manner between the surviving spouse's share and deceased spouse's share, provided the division results in each spouse receiving equal aggregate value. (3) Once each spouse's share is established, the surviving spouse is free to amend the FLCPT as it pertains to his or her share, and the deceased spouse's share shall be administered in the manner provided for in the FLCPT.

Of significant importance is the default rule that allows the trustee to divide the assets upon the first spouse's death. The surviving spouse serving as trustee in this situation could, especially without professional guidance, result in unintended consequences, such as an inequitable asset selection, (4) creditor exposure, elective share funding issues, failure to qualify for a full fair market value (FMV) basis adjustment, (5) or homestead devise restrictions. The FLCPT agreement can opt out of default treatment by including terms that address the division of assets upon a spouse's death. Such terms could provide for a predetermined division of assets or a specific methodology for dividing the assets (such as minimizing taxes or avoiding non-exempt assets passing to a debtor spouse). An additional option is to delegate the authority to make the division to another party. (6) While selecting a person, group, or entity to make the division could result in the same concerns, the potential for negative consequences can be minimized by ensuring qualified professionals are involved with division of FLCPT assets.

Homestead: Devise

Careful consideration is always necessary when planning with homestead property due to Florida's complex homestead rules. (7) Thus, homestead planning with an FLCPT is no different and should marshal the same attention and consideration. The planning limitations stem from Fla. Const. art. X, [section]4(c), which provides that "homestead shall not be subject to devise if the owner is survived by spouse or minor child, except the homestead may be devised to the owner's spouse if there be no minor child." If homestead is impermissibly devised at death, then the homestead "shall descend in the same manner as other intestate property; but if the decedent is survived by a spouse and one or more descendants, the surviving spouse shall take a life estate in the homestead, with a vested remainder to the lineal descendants in being at the time of the decedent's death per stirpes." (8) Should a surviving spouse not desire a life estate, he or she may instead elect to take a one-half interest as a tenant in common with the remaining one-half divided among the deceased's spouse's descendants. (9) The homestead devise limitation is always in play because an FLCPT may only be employed by both spouses. Provided there are no minor children, then as long as the FLCPT provides that all the assets pass outright to the surviving spouse (or stay in the FLCPT with the surviving spouse having absolute control), it does not run afoul of the devise restriction. If upon the death of the first spouse any portion of the homestead is directed to another beneficiary or to an irrevocable trust (including a trust for the surviving spouse), the attempted devise will fail. (10) This unintended consequence may be avoided by including homestead waiver language in a nuptial agreement (or in the FLCPT agreement, provided it complies with the nuptial agreement requirements), or, at the very minimum, using a deed that waives homestead rights when conveying the homestead to the FLCPT. (11)

Unfortunately, no nuptial agreement or deed prevents application of the devise restrictions when a spouse dies and is survived by a minor child. While F.S. [section]736.151 does address homestead property, it is silent on the treatment of homestead at death. Therefore, when a spouse is survived by a minor child, one might assume that upon the first spouse's death, one-half of the homestead in the FLCPT will be deemed improperly devised. (12)

Such treatment would, by default, cause the surviving spouse to receive a life interest in the deceased spouse's one-half share with the remainder interest being owned by the deceased spouse's descendants. (13)

Upon further analysis, this result appears to be avoidable. Fla. Const. art. X, [section]4(c) provides that "[t]he homestead shall not be subject to devise if the owner is survived by spouse or minor child." (14) The term "devise" is defined in the Florida Probate Code to mean "a testamentary disposition of real or personal property" (15) and "includes a disposition by trust of that portion of the trust estate which, if titled in the name of the grantor of the trust, would be the grantor's homestead." (16) F.S. [section]736.1507 provides:

Upon the death of a spouse, one-half of the aggregate value of the property...reflects the share of the surviving spouse and is not subject to testamentary disposition by the decedent spouse" and "[t]he other one-half of the value of that property reflects the share of the decedent spouse and is subject to testamentary disposition. (17) Thus, only assets included in the deceased spouse's one-half share are subject to devise. If the homestead is not part of the deceased spouse's one-half share, then it is "not subject to testamentary disposition by the decedent spouse" and avoids triggering any homestead devise restrictions because there is no actual devise of any interest of the homestead property. Therefore, the homestead limitations on devise may be avoided simply by preventing any interest in the homestead from being part of the deceased spouse's one-half share.

The default rules under the act provide that the trustee must first allocate assets to the surviving spouse's one-half share and such allocation need not be pro rata. After the trustee's allocation to the surviving spouse, the remaining assets are subject to devise by the deceased spouse. (18) Therefore, if a minor child was living at the death of the first spouse, the trustee could opt to allocate all the homestead to the surviving spouse's share to avoid an invalid homestead devise. This approach would result in no basis adjustment to the homestead property because less than one-half (actually none) would be included in the deceased spouse's gross estate. (19) Spouses may alter the default rules by including specific provisions in the FLCPT addressing homestead and the division of assets upon the death of a spouse. (20) Alternatively, the homestead devise restrictions also may be avoided by using an irrevocable FLCPT (21) or waiting until neither spouse has any minor children before putting homestead into a FLCPT.

Homestead: Alienation

The Florida Constitution does not restrict the transferor spouse from transferring homestead while living, provided that the transferor spouse has the other spouse's consent. (22) Therefore, spouses must keep in mind that regardless of how the homestead is owned, it will require both spouses participating in the deed transferring the homestead into the FLCPT.

Homestead: Taxation and Creditor Protection

The act explicitly provides for the continuation of the homestead tax exemption and creditor protection benefits for homestead property owned by the FLCPT. (23) Therefore, spouses may maintain their homestead tax exemption ($50,000), continue to benefit from the Florida Save Our Homes tax cap (which limits the increase in the assessed value of homestead for ad valorem tax purposes to the lesser of the year-to-year change in the Consumer Price Index or 3% increase per year), and keep safely in place Florida's constitutional homestead creditor protection. Nonetheless, to the extent the homestead property exceeds the size limitations (one-half acre within a municipality or 160 acres if not), then that portion of the property will be exposed to the creditors of either spouse. (24) The creditor exposure would not traditionally impact a married couple that acquired homestead property in excess of the size limitations as tenants by the entirety (TBE) because, in Florida, TBE property is exempt from the creditors of only one spouse. (25)

Creditors

The debt of one spouse may be satisfied from that "spouse's one-half share of a community property trust" excluding protected homestead. (26) The act defines "community property trust" to mean a trust that complies with the act, (27) and pursuant to the act, "[a]ll property owned by a community property trust is community property." (28) Unfortunately, the act does not provide a formal definition of "spouse's one-half share" and does not provide explicit rules or guidance as to which of the FLCPT assets are exposed to the creditors. F.S. [section]736.1504(1) provides that when establishing a FLCPT, the settlor spouses may agree upon "[t]he rights and obligations," "[t]he management and control," and "[t]he disposition of the property transferred to the trust on dissolution, death, or the occurrence or nonoccurrence of another event, subject to [section][section]736.1507 [death of a spouse] and 736.1508 [dissolution of marriage]." A creditor claim should be deemed to be the "occurrence...of another event" that does not involve the...