Tax and asset protection benefits afforded Florida domiciliaries.

• Author: Pratt, David
• Position: Tax Law

The most common reason an individual chooses to live in Florida is its temperate climate. But Florida's benefits extend far beyond a warmer climate because of its favorable tax laws and asset protection opportunities. Since Florida does not impose an individual income, estate, gift, or generation-skipping transfer tax, and has very favorable asset protection laws, it is far superior than other states with respect to these matters of great concern to most people.

While Florida residents who want to avail themselves of asset protection may need to take steps to obtain those benefits, Florida residents can avail themselves of Florida's beneficial tax laws without necessarily taking affirmative action (other than perfecting their Florida domicile). However, they must be mindful of lurking pitfalls if they own property in another state or if they spend significant amounts of time in another state, as they may then subject themselves to state income tax in that state during their lives and/or state estate tax upon their deaths.

Current Tax Law

An individual who is contemplating changing his or her domicile to Florida should consider doing so in 2010 because of the potential that tax laws may change. The federal estate tax exemption in 2009 is $3.5 million, but the future of the federal estate tax and the exemption amount is uncertain. Absent congressional action, the estate tax is scheduled to be repealed in 2010 and will be reinstated in 2011, but with a $1 million exemption. Many practitioners and commentators believe that Congress will take action in 2010, and that the federal estate tax exemption will remain at $3.5 million (at least until there is further reform) with a top tax rate of 45 percent. In addition to a federal estate tax, some states impose a state estate tax. In many cases, the state estate tax exemption is lower than the federal estate tax exemption, which can cause an unintended state estate tax to be payable, while other states, such as Florida, do not impose an estate tax.

Similar to the flux of the estate tax law, some state income tax rates will increase in this year. Because Florida does not impose an income tax, it is an attractive domicile for those who want to decrease their individual income tax liability. For individuals who are currently residing in a jurisdiction that has a city and/or state income tax (the combined effect of which can exceed 10 percent annually), as well as an estate tax (with tax rates approaching 16 percent in states such as New York), the tax cost of remaining a resident in that jurisdiction can be significant.

Under current law, individuals with adjusted gross income of $100,000 or less can convert from a traditional IRA to a Roth IRA. Effective January 1, 2010, there is no longer an income limitation imposed to take advantage of this conversion. When an individual converts to a Roth IRA, he or she will incur a federal income tax and, depending upon the state in which the individual lives at the time of the conversion, a state income tax. If an individual lives in a state that imposes an income tax, he or she should convert to a Roth IRA in the year after changing domicile, as the state income tax savings could be significant.

Advantageous Tax Laws

Florida is one of the few states that does not impose estate, inheritance, gift, income, intangibles, or generation-skipping transfer (GST) taxes. Most other states impose at least one, and more commonly several, of these taxes. For instance, New York and Vermont impose estate, income, and GST taxes; Connecticut and North Carolina impose estate, gift, and income taxes; Illinois imposes income and estate taxes; and Kansas imposes income, estate, and intangibles taxes. Some states, such as New Jersey, impose an inheritance tax in addition to the estate tax.

* Estate Taxes--As a result of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the state death tax credit that was applied against the federal estate tax for death taxes paid to a state was phased out. In 2005, it was replaced with a deduction against the federal estate tax. Prior to EGTRRA, Florida imposed a "pick-up estate tax," such that the estate tax payable to Florida was equal to the state death tax credit. When the state death tax credit was phased out, Florida ceased to impose an estate tax.

Since Florida's Constitution provides that the state cannot impose an estate or inheritance tax that exceeds the amount allowed as a credit or a deduction against the estate tax imposed by the United States or by another state, (1) Florida cannot impose an estate tax unless it amends its constitution or the state death tax credit is reinstated. It is highly unlikely that the people of the state of Florida would amend their constitution to institute an estate tax. Other states that do not have this constitutional restriction, such as New York, "decoupled" from the federal system and now impose an independent estate tax, which allows those states to continue to collect the tax dollars they would have otherwise sacrificed.

Although the estate of a Florida domiciliary will not be subject to a Florida estate tax, an unknowing Floridian may unintentionally subject his or her estate to an estate tax in another state. Real property and...