The Florida Intangibles Tax: the real voluntary tax.

• Jurisdiction: United States
• Date: 01 November 2000
• Author: Law, Lester B.

This article provides suggestions on how to avoid the Florida intangible personal property tax and addresses salient pointers that may be useful for planning.

As a result of recent changes to the Florida Intangibles Tax (FIT), the legislature has all but repealed the FIT. The skeleton is all that remains of the once dreaded and costly FIT. Essentially, the legislature has reduced the rate by one-third, completely removed trusts from the FIT roles, and created a voluntary tax for most other taxpayers. That's right, the current reach of the FIT is so narrow and easy to avoid, it can be called a voluntary tax.

The Old Law

In general, a taxpayer (which includes individuals, corporations, partnerships, limited liability companies, estates and trusts) was subject to the tax if the taxpayer had a taxable situs in Florida. Of course, this required that the taxpayer owned, managed, or controlled taxable intangible assets(1) on January 1(2) of any particular year. For instance, if an individual owned taxable intangible assets and such person was a Florida resident, he or she would be subject to the FIT at the then prevailing rate of tax.(3)

With respect to trusts, special rules applied. For trusts, unlike other entities, the determination of whether a trust had a taxable situs in Florida was based upon whether 1) the trustee had a Florida situs,(4) or 2) the trust had a Florida resident who had a taxable beneficial interest.(5)

The New Law

The new law, which became effective July 1, 2000,(6) reduces the tax rate from 1.5 mill to 1 mill (i.e., a one-third reduction of the rate). It also removes the provisions that cause a trust to be taxed as a result of a trustee causing the trust to have a situs in Florida. What remains is that the trust assets are subject to the FIT if a Florida resident had a taxable beneficial interest in the trust.(7)

* The Beneficial Interest Test

A Florida resident has a beneficial interest in a trust if such person has a current right to income, and, either 1) a power to revoke the trust, or 2) a general power of appointment, as defined in IRC [sections] 2041(b)(1).(8) As discussed in more detail below, although not enumerated in the statutes or administrative rules, I believe that the right to revoke test applies to situations in which grantors are also beneficiaries, and that the [sections] 2041 requirement applies to situations in which the grantor is not the beneficiary.

* The Current Right to Income

Neither the statutes nor the Florida Administrative Code explains what constitutes a "current right to income." However, a plain and literal reading of the statute leads me to believe that a discretionary right in the trustee to distribute income would not satisfy this prong of the test. This is supported by some of the language in a few Florida Department of Revenue technical assistance advisements (TAAs) and some of the language in the now partially obsolete safe harbor rules.(9) For example, in a typical education trust for a grandchild, the trustee (not the grandchild) has the discretion to distribute income to the grandchild until a specified age (e.g., 18 or 21), and thereafter the income must be distributed. Before the specified age, the grandchild would not have a current right to income and, therefore, the grandchild would not have a taxable beneficial interest, even though the grandchild may have a testamentary general power of appointment.

A different case may arise if the trustee had full discretion to distribute income and the beneficiary and the trustee were one and the same person. Perhaps, in that case, the "right to income" provision would be satisfied. The control as trustee may be tantamount to giving the beneficiary/trustee the current right to income.

* Right to Revoke

A question arises whether having the naked power to revoke a trust without a "current right to income" would create a beneficial interest in a Florida beneficiary. This is not evident by simply reading the statute. However, the DOR, in its recent promulgation of the rules applicable to the FIT, has indicated that when a grantor retains the right to revoke a trust, the grantor would be subject to the FIT.(10) As indicated above, before the recent statutory change, from a purely statutory analysis, the trust's assets could only be taxed through the trustee or the beneficiary, and not through the grantor. After the amendment to the statutes, the only way to be taxed is if the beneficiary has a beneficial interest. One could argue that the DOR's regulatory rule is a mere extension of the beneficial interest rule in that it merely elaborates upon the statutory rule. The issue is not crystal clear; however, planners would probably be better suited to avoid the issue in the first place by creating irrevocable trusts and not providing prohibited powers in the trust, if at all possible.(11)

* Section 2041 Power

As indicated above, this author believes that the [sections] 2041 power requirement was designed to deal with situations related to trusts when the grantors were not the beneficiaries. The rationale for this is that under [sections] 2041 and the Treasury Regulations promulgated thereunder, arguably a grantor cannot give himself or herself a general power of appointment.(12) Thus, it seems that this second prong should not apply to cases to determine whether a grantor has a...