Florida Community Property Trust For Ohio Resident and The Upcoming Estate Tax Cliff with Craig R. Hersch | Repair the Roof Podcast

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Hello everyone, my name is Attorney Ted Gudorf. Welcome to the Repair the Roof podcast. This name comes from President Kennedy’s famous quote, The time to repair the roof is when the sun is shining. In this show, we help individuals and families learn more about all things estate planning and elder law.

Today’s topic is Florida Community Property Trust and how they can help folks who live in Ohio. Today’s guest is attorney Craig Hirsch from the Shepherd Law Firm in Fort Myers, Florida. Welcome, Craig. Thanks, Ted. Thanks for having me. Craig, understanding is you’re a certified specialist in estate planning. How long you’ve been doing this? I’m in my 35th year of practice. So, yeah, 35 years.

And I’ve been board certified in Florida since I was eligible, which is five years in. Great. Well, look, the Community Property Trust statute is new in Florida, is my understanding. Why don’t you tell us a little bit about how the statute came to be adopted when it took effect? Yeah, the statute’s about two years old, two and a half years old now. The idea behind it is to give…

residents or not even residents, can be, as we’ll talk a little bit later, you can be an Ohio resident and get the Florida benefit as well. But it’s for people who are of common law states to get community property tax treatment, and that’s largely associated with what’s colloquially known as the step up in tax cost basis. So we’ll talk about that today a little bit. the type of asset that this applies to.

Does this apply to everything that I own or is it only certain assets? It applies to most everything you own. Real estate, it could apply to a business, a closely held business interest. It can apply to investments. Although assets inside of qualified retirement accounts such as an IRA account or a 401k account, those do not get any step up in basis treatment. But most everything else that you own would. So we’re really talking about

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what I call capital assets. And so a capital asset under the tax law has something called basis. What is basis? Basis, Ted, is basically what you paid for a capital asset. For example, your residence, if you bought your residence for $150 ,000 or two, let’s call it $150 ,000.

And then let’s say you later added a room and it cost you $50 ,000, your basis in the properties, what you paid for those things, which would then equal $200 ,000. So it’s what we paid for the capital asset plus any improvements. That’s right. And that particularly applies to things like real estate or stock or business assets, correct? Right. Let’s take investments, for example. If I bought an investment, I put $10 ,000 into a stock.

into a stock holding. And if I was reinvesting the dividends, if I had a drip plan, a dividend reinvestment plan, my new basis would be what I paid for that stock plus the dividends that I reinvested. Very good. Why do we care about that? Why do we care about basis? If we never sell the asset, does it ever really matter? Yeah, that’s called an unrealized gain.

we don’t recognize a capital gain. We don’t pay capital gains taxes on an asset until we’ve sold it. And that’s when we realize the gain, which is generally speaking, the difference between the sales price and our basis. once again, if we never sell the asset, then we don’t have to pay any tax on that gain. That’s right. So we’re really talking about situations where somebody owns a capital asset.

they’re going to sell it, let’s say, initially during their lifetime. What you’re saying is that we’re gonna pay a capital gains tax, right? Yeah, that’s right. Under the federal tax law, tell me a little bit about the difference between a capital gains tax and an ordinary income tax. Yeah, that’s a good question. As you’re aware, ordinary income is taxed at the highest marginal federal rate today is 37 % when we’re filming this.

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podcast episode, whereas the highest capital gains rate is 20%, although if you have additional income, you might be paying a Medicare surtax, which is 3 .8%. So our maximum capital gains tax is as high as 23 .8 % as opposed to 37 % on ordinary income. not only do we get a little bit of a break on the sale of a capital asset compared to say W -2 wage income,

We also have some other tax benefits with capital assets. Let’s talk about what happens when we pass away and we own a highly appreciated capital asset. What does the tax law say about that? Well, if with a highly appreciated asset, let’s say that I own an asset that’s worth a million dollars today, but I only paid $200 ,000 for it and I die holding that asset. Well, now

my heirs, my beneficiaries get that asset at its new basis, at the adjusted basis at the time of my death, a million dollars. So if they then sold that asset for a million dollars, they would recognize no capital gains tax. And contrast that where if I sold it the day before my death, I would have had an $800 ,000 capital gain to pay taxes on. So one strategy with respect to

folks who own a capital asset, whether it be stock or real estate, if they really are not interested in paying the capital gains tax, one strategy is simply hold the asset until you pass away and then have your heirs sell it soon thereafter. And that pretty well wipes out any capital gains tax. That’s right. But consider if I hold that asset jointly with my spouse.

Okay, if I live in a common law state, there are 41 common law states. Ohio is one of them, Florida is another. Let’s go back to my same example. I own it jointly with my wife, the $200 ,000 that we paid $200 ,000 for that property. I die and it’s worth a million. Well, in that case, we only get a step up in basis on my half in a common law state. So my original basis on my half was 100 ,000, my half…

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of the adjusted value at the time my death is 500 ,000. So my half jumps up to 500 ,000. My wife’s half still stays at 100. So what that means is if she sells it the day after my death, she still has a $400 ,000 capital gain. That is a big deal. Yeah, it really is because so many married couples own their investments. They own their properties jointly. Now,

Contrast this with a common, with a community property state. There are nine community property states. They stretch from Louisiana, West to California and up to Washington with the exceptions being Oregon is not a community property state, whereas Idaho is and Wisconsin is also a community property state out there in the Midwest. So in any event, if I live in a community property state, same set of facts.

Wife and I bought the residence for 200 ,000. It’s now worth a million. I die. Only I die. She gets a step up all the way up to a million in a community property state. So she sells it the next day after my death. No capital gain at all, as opposed to residents of common law states, Ohio being among them. She would still have a $400 ,000 gain on which to pay tax. know, Craig, some might say the unequal treatment.

from a community property state to a separate property state, it doesn’t make sense when we’re dealing with federal law, because shouldn’t federal law be the same for all 50 states? How is it possible that it can be different? You know, that’s a great question. And you would think that it is a federal law, so we would all pay the same tax, right? But here’s the thing, a lot of federal tax law is state dependent, how the state treats the asset.

So, and this is where these community property opt -in trusts come into play. But in any event, the IRS says, well, if the state treats it this way, we’ll treat it that way as well. And that’s where, you you have a federal government of 50 states and each state has their own laws. So in some respects, state law can affect the federal tax law. So here, both your state, Florida, and my state, Ohio,

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are separate property states. We’re not one of the community property states, That’s right. That’s right. So tell me if you’re in Florida and you’re a separate property state, now all of a sudden we’re introducing a community property option into Florida law. How does that work? Yeah. Well, actually, Florida is the fifth state to enact a…

a law like this. Alaska was the first about 26 years ago, and then South Dakota followed a few years after that, then Tennessee, Kentucky, and now Florida. And what these five states have decided is they want to enable a resident of a common law state, like Ohio, like Florida, to get the same tax benefits as a resident of a community property state. they created this law.

where you can create a community property trust and then put those assets in that trust and you get community property treatment under state law. And because you get community property treatment under state law, you end up with the community property benefit under the federal tax law. that community property benefit includes either a step up or I suppose we should also mention

potentially a step down in the value. Yeah, a lot of people think everything’s a step up, as you point out, but it’s really what the tax code says in the code section is 1014. And what it says is an adjustment to fair market value at the time of death. So in most cases, that’s a step up, meaning that it is adjusted upwards because it is appreciated in value. If the asset is depreciated in value, it could be a step down.

let’s talk a little bit about this trust concept. Is this a revocable trust? Is it an irrevocable trust? What does this trust look like? And who can create it? Who can be the trust makers and who can be the trustees of it? What does it look like? Yeah, that’s another great question. Now, in some of the states, and these states are the ones that have domestic asset protection statutes like Ohio’s. I think it’s Alaska, South Dakota,

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and Tennessee, their trusts are by default irrevocable. Florida’s is by default revocable. So unless you make it irrevocable to revocable trust, very similar to any joint trust that you might create between a husband and a wife, or a husband and a husband, you know, we have, you know, same sex couples as well. But so long as it’s a married couple.

and they create the trust and they opt into this community property treatment. one of the things about opting in a community property treatment is the fact that you have, you know, let’s say I have a nuptial agreement with my spouse and let’s say that it says on divorce, you know, I get 70 % and she gets 30 % or we have some kind of financial arrangement that’s different than what would otherwise be community property, which is 50 -50.

So if I put these assets into a community property trust, all five state statutes are similar in this respect, it’s treated as community property and any other agreement that you may have had about these assets you’ve transferred in is no longer applicable to lease those assets. And there’s creditor rights issues as well that we can get into. So when you’re forming them in Florida, that’s an interesting option. Are you doing both revocable and irrevocable or…?

Have you gone one way or the other? The ones that we’ve done for our clients are mostly revocable. Okay. Because unless we’re doing some estate tax planning, we want to make… But here’s the problem. When you make them irrevocable, then you have to somehow trigger the step up another way through, let’s say, an intentionally defective general power of appointment, which is a technique that you use to give the spouses the right to direct the assets.

Yeah, you know, the the irrevocable trust segment of it is usually in a domestic asset protection trust type of a scenario, which that’s a law that we do not have in Florida. We’ve tried to get it several times, but the bankers lobby and the personal injury lobby is very strong in Florida. And we haven’t been able to to accomplish that. But but yeah, in direct answer to your question, most of the ones we do are revocable.

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So in that case, if you have a married couple, who’s the trustee? the grantors are usually the married couple themselves and the trustees can be the married couple, just like a regular revocable trust. And do you find that it oftentimes will mirror the provisions of their standard revocable trust? Yeah. And in fact, in many cases, what we’ve done with our clients is it just replaces their old joint trust. You know, the only time again that we normally worry about a different

scenario is when we have assets that the couple want to keep separate and distinct pursuant to some kind of a nuttural agreement. So, are you ever in a situation where you’re creating a separate opt -in trust? yeah. A husband and Yeah, but it’s less common. Most of our clients, it’s their foundational document is the opt -in trust, the community property opt -in trust and it’s the foundational document because

You know, most of our clients have the same beneficiaries. You know, they’ve been married a long time. They don’t have a natural agreement. So for that couple, a community property trust is ideal. So give me some examples of the types of assets that individuals who have come to you have placed in this community property trust. Residences, both inside and outside of Florida.

their investments that are not in IRAs. before you go on, I thought we had an exemption that applied to our residences that wouldn’t be needed for this kind of scenario. Yeah, what you’re talking about there is a section 125 exemption, which is the, you know, when I sell my primary residence, that’s been my primary residence for two of the last five years, then I have an exemption of 125 ,000 for an individual or 200

or I’m sorry, it’s 250 ,000 for an individual, $500 ,000 for a married couple. But let’s say that I have a home that has appreciated beyond that 500 ,000, right? If that’s the case, the community property trust helps out in the sense that we eliminate all of the capital gain, not just $500 ,000 of it. So we’re really talking about households where they own a residence that

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simply is over $500 ,000, which is pretty common these days. Well, over $500 ,000 in appreciation. Yeah. Yeah. anybody who’s held their home for a long time might be bumping up against that or over that depending upon where they are and so forth. But it’s residences both inside and outside of Florida. You could have a residence anywhere and put in a community property trust in their investment accounts.

And again, they don’t have to be in Florida. It can be anywhere. The investment accounts. Depreciated property is another great example. So if I own a strip center and, you know, then I can get community property trust treatment on that. Now it gets a little bit more complicated if it’s inside a partnership, which a lot of those depreciated properties are in, commercial properties are in. But almost any kind of

property is a good idea to put into an investment into a community property trust. Fascinating. Now, let’s talk a little bit about its application, in particular to Ohio residents. How is it that… Let’s say I happen to represent a lot of farmers. Our farm values in Ohio have just skyrocketed. You know, I have clients of mine who paid $1 ,000 an acre.

And today, the land is selling in excess of 25 ,000 an acre and they own 500 acres. typically, in our farm scenario, our farm couples, they own everything jointly. And I will say this, oftentimes, the husband passes away first and the wife is there and she wants to sell the property. I mean,

And sometimes she’s selling it maybe to a grandchild or selling it to a neighbor or something like that. How would an Ohio resident maybe who owns a farm, how would this work? How and why does it work for an Ohio resident to be able to create a Florida trust? Is it really possible for somebody from Ohio to create a Florida trust? In theory, it is.

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Alaska’s had these statutes for 25, 26 years, and most of the people establishing Alaska community property trust were not Alaska residents. They were residents of other States because of what Alaska did in trying to do this in South Dakota did. And now Florida, the idea is to try to attract investments to the state. Now what Alaska did and, many of the other States do is they say you need, an Alaska bank or trust.

company to serve as a trustee. And that’s how they invite the individuals who want to use Alaska law to their benefit. And that’s what benefits Alaska. Now, in Florida, for example, you can name a resident. You need a Florida resident or a Florida trust company or bank or national bank as a trustee. So that’s the one catch that an Ohio resident would need.

is they would need somebody in Florida to serve as a trustee. But so long as they had that, then they would qualify under the Florida Community Property Trust Statute. They could put their Ohio farmland in it and then achieve community property status.

And that seems pretty straightforward, pretty easy to do. Any controversy about that at all? Well, know, commentators have suggested that the IRS may challenge it. But remember that Alaska statute is now 26 years old, and I’m not familiar with any challenges to it from the federal IRS. One of the sticking points that some of the commentators suggest the IRS might use if they were to try to use it

is the creditor issue. In normal community property states, a husband and wife are liable for each other’s debt. a creditor, like if I’m a doctor and I own community property with my wife, okay, and there’s a, I have a liability to a judgment creditor, they can attach to our community property assets. Now, Florida statute says, for example, that the only assets

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that are subject to that individual’s creditors are that individual’s share of the community property. So there are some differences legally between a community property state law and how community property normally works and these community property statute laws. And there is no…

uniform community property law out there. So these states are drafting their own statutes and they’re very different from one another. Kentucky and Tennessee’s and South Dakota’s really are quite simple. They don’t really go into much. Florida’s is much more in depth. Florida’s a more recent one. What Florida does, interestingly with creditors, this is interesting too, is an independent trustee, not one of the grantors who are trustees. So husband and wife,

even if they’re serving as trustee, they can’t do this that I’m about to talk about. But what an independent trustee can do is allocate certain assets as satisfying the community property share. Now in Florida, there’s a Florida homestead exemption that’s very, very difficult. Creditors generally cannot get to your Florida homestead. So let’s say if that’s your primary residence, that’s your Florida homestead, it’s your primary residence.

Let’s say that you have a million dollars of residence and a million dollars of investments. Well, the investments a judgment creditor could easily get to, But what the independent trustee could do is say, the husband share in this case, I’m saying the husband is liable, is the homestead and wife’s share are all the investments. So they can play some games under the Florida law with creditor protection.

And even though Ohio residents don’t have a Florida homestead, because by definition, they’re Ohio residents, they could still play games. For example, if they have assets there in an LLC that are harder for a creditor to get to under the Florida statute, you could allocate that interest to the debtor spouse. So there’s some creditor issues, but again, the IRS has not brought those up.

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and an Ohio resident is free to use the Florida statute if he or she wants to. Fascinating. when we kind of wrap this up, for those clients who have highly appreciated assets, who own them, husband and wife, probably a longstanding marriage, who want to take advantage and give their spouse the option of being able to sell that appreciated asset after

one of them dies and not pay any capital gains tax. This seems like kind of an ideal solution for those couples. Yeah, to me, it’s a no brainer because let’s assume that the IRS actually challenges the community property status for some reason. Where are we? Well, the couple’s put back in the same position that they would have been in. They’re still going to get a half step up in tax cost basis.

So, the only thing that really out is the legal fees and costs associated with the establishment of the community property trust. But again, I haven’t seen anything, you know, where the IRS is challenging these. That’s not to say that someone’s gonna be the first at some point. Well, and I think on top of that, you and I both understand that in the community property states, the step up at the first death is automatic and the IRS has never challenged that. Yeah.

So what I’m talking about is the full step up, you know, challenge that. yeah, you know, my view is it’s worth a shot because you’re put, even if it fails, you’re still in the same position you would have been otherwise. And if it works out, you’ve eliminated a substantial amount of capital gains, which then frees, you know, I have some clients, I’m sure you do also Ted.

I’ll give you an example, right there in Ohio, Procter & Gamble. So I had some clients who owned a lot of Procter & Gamble stock because they worked at Procter & Gamble and a lot of it was outside of a qualified retirement account, was just investments that they owned. And all their financial advisors were urging them to sell some of it because they were overweighted in one stock and they wouldn’t do it not only because they thought it was a good investment, but because they were afraid of

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paying the capital gains tax. They didn’t want to pay the capital gains tax. Well, if you put all that Procter & Gamble stock into a community property opt -in trust, and then one spouse dies, the surviving spouse suddenly has the option of diversifying if he or she wants to, whereas before they would have paid a lot of capital gains tax to accomplish that. Great. Let’s shift gears a little bit. We’ve got some changing landscape that may be happening.

over the course of the next couple of years with respect to the federal estate tax. You know, when I started to practice in 1986, the federal exemption amount, that is the amount that each one of us could pass tax -free to our children was somewhere around $600 ,000. What’s the exemption amount today and what changes are we looking at coming down the road here?

Yeah, the exemption amount today is what’s over $13 million, as I recall. And what happens is the current law sunsets at the end of 2025, which – you say sunsets, what does that mean? What that means is it was an act passed during the Trump administration in 20, what was it? must have been 2017, 2018, somewhere in there. Yeah.

It was passed through budget reconciliation as opposed to what it would normally need as 60 Senate votes to get the, to pass. didn’t have the 60 Senate votes to pass. So they, the only way they could do it is through budget reconciliation, which is at a maximum 10 years. And you’re thinking, well, why didn’t it go to 2027 when the law was passed in 2017? I think it was the Tax Cuts and Jobs Act is the name of the statute.

But in any event, the reason it only went eight years is because under budget reconciliation, it can only increase the deficit by so much. So it had to be stopped at eight years. So what happens is the law that has these huge exemptions now for us, more than $26 million between a married couple is

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Now, Sun sets at the end of 2025, which means it goes back to the old law, which is the law that they passed during the Obama administration, which was basically $5 million exemption per person and then adjusted to inflation. The pundits believe based on the inflation numbers that it will fall somewhere between six and $7 million to each person. So in other words, between a married couple or even for an individual, the exemption amount will roughly

half. It’ll be cut in half between… On January 1st of 2026. So if I’m a single person and I have an estate worth more than $7 million, and I am gonna… Let’s assume I pass away after January 1 of 2026, you’re saying we’re gonna pay a federal estate tax. Does the rate change as well?

the rate would go back to the Obama rates, and I think, you know, which is 40 % is the top rate, as I recall. But… So we’re gonna pay a federal estate tax of some amount over the excess over the $7 million exemption amount for a single person. That’s right. Now, what most wealthy clients should consider between now and the end of next year,

is to use up that exemption, the 13 plus million dollar exemption, before it expires. Because that exemption is not just an estate tax credit exemption. It’s a gift and a state tax exemption, meaning that my exemption covers gifts that I make during my lifetime, as well as the transfers that I make at death, and it’s one exemption. So if I use it all up during my lifetime, then there’s no more left.

at my passing. Now, these are gifts above what we call the annual exclusion amount, which today is $18 ,000. I can give $18 ,000 to anyone I want, and it’s not counted towards my gift tax exemption. But once I make gifts above that, then it’s counted. So the lifetime exemption amount is over $13 million today. It’s going back to roughly $7 million on January 1, 2026. Do I understand that right? Yes.

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So the opportunity each of us has is if we have an estate that’s valued above that amount, between now and the time the law changes, we have the ability to give away during our lifetime that $13 million. And you’re saying if we do that, even though the law is gonna change in 2026, we’re still gonna be okay. They’re gonna recognize that gift.

that we’re making perhaps to a trust for our spouse or for our kids. That’s right. I just verified, I looked it up. It’s $13 .61 million in 2024. Last year, it was 12 .92. So it’s going up significantly, probably will go up again next year. But yeah, you’re right. Once you’ve made that gift, it’s outside of your estate. Now, there are certain types of gifts that can be clawed back if they’re made within three years of death. Insurance is a

common example of that, if I have a life insurance policy and I put it into an irrevocable trust. And that’s another point. When we’re making these gifts, they should be either outright or in a trust, an irrevocable trust, if the grantor has the power to have the income off the gift, generally speaking, there’s some exceptions to all this, has the power to direct it, has the power to…

receive the income off the gift, then it’s not really a completed gift for a gift in a state tax purposes. So you would do this, and I suggest all my clients, let’s use an irrevocable trust. And the other idea is to use up not only your gift in a state tax exemption, but there’s something called the generation skipping transfer tax exemption. Now this doesn’t mean that you’re skipping your children. What it means is you’re skipping your children for

gift and estate tax purposes. In other words, if I created a trust for my daughter and the trust is designed to go on for her children’s lifetimes after her, the gift is, and we apply my generation skipping transfer tax exemption to it, then at her death, no matter what that gift has ballooned to, you know, might’ve doubled in value over the course of her lifetime.

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it’s not included in her estate for estate tax purposes. So the generation skipping transfer tax exemption is equally as important to your family as is the gift in estate tax exemption. Well, that’s fascinating. So it sounds like we have a lot of planning opportunities over the next couple of years here to try to do some estate tax planning for those clients who have a substantial wealth.

above and beyond the 7 million if you’re single or 14 million if you’re at marriage. Yes, certainly. Well, Craig, it’s been great having you with me today. I really appreciate your insight, your expertise. It’s really insightful. I learned a lot. Thanks for being with us. Well, thanks for having me.

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Until our next session, just remember the time to repair the roof is when the sun is shining. To get started with your estate plan, can go to gudorflaw.com forward slash getting started. For a free copy of our recently published book called The Ohio Estate Planning Guide, go to gudorflaw.com forward slash book.