Florida homestead: a difficult post-mortem estate tax planning property.

• Author: Robison, Mary A.

As many estate planners have found, Florida homestead property can be a difficult asset to use in post-mortem planning. This is particularly true in situations where the surviving spouse, who owns a life estate in the homestead, is not the parent of the decedent's children, who own the remainder interest in the homestead. Decisions involving the improvement or sale of the homestead often involve conflicting interests among the life tenant and the remaindermen. As difficult as these conflicts may be, federal estate and gift tax laws present an even more thorny dilemma with respect to homestead property when a sale of the homestead is contemplated by the surviving spouse and children.

In the absence of a valid devise, Florida homestead law provides that, if an individual dies owning a Florida residence titled in his name alone, and is survived by a spouse and lineal descendants, the surviving spouse takes a life estate, and the lineal descendants take a remainder interest, in the property. (1) If, however, the decedent is not survived by a minor child, he can will the residence to his spouse. (2) Thus, if consulted in advance, an estate planner can often avoid both the potential conflicts and the adverse estate and gift tax consequences associated with homestead property, either by having the residence titled in the names of both spouses (as tenants by the entireties) or, where there are no minor children, by having the testator devise the homestead to the surviving spouse. For this reason, difficulties involving homestead property most often arise where the decedent either dies intestate, or fails to change his will (or the title to his home) after a second marriage.

Upon the death of the owner of the homestead, the family has nine months to make two decisions which can substantially affect both the potential for conflict inherent in the co-ownership of property and the homestead's status for tax purposes. The first decision is whether the estate should elect the marital deduction for the homestead on the decedent's estate tax return. (3) The second decision is whether the surviving spouse or the lineal descendants should disclaim the life estate in favor of the remaindermen. (4)

Electing the Marital Deduction for Homestead

Where a decedent is survived by a spouse and leaves a homestead as a part of a taxable estate exceeding the amount of the available applicable credit (equivalent to taxable assets of $1,000,000 for 2002), the estate can claim the marital deduction for the homestead. (5) If the estate claims the marital deduction, the value of the homestead will not cause taxation in the decedent's estate, but will be included in the taxable estate of the surviving spouse. (6) Conversely, because the homestead is a terminable interest, the value of the homestead will not be included in the surviving spouse's taxable estate if the estate does not claim the marital deduction for the homestead. (7)

Where the decedent's taxable estate (including the homestead) exceeds the amount covered by the decedent's available applicable credit, electing the marital deduction for the homestead may appear attractive, especially when the surviving spouse does not otherwise have a significant taxable estate. If the surviving spouse does have a significant taxable estate, and dies still owning the homestead, its value will be included in his or her taxable estate and may therefore generate estate taxes. (8) On the other hand, if the value of the surviving spouse's taxable estate does not exceed the amount covered by the available applicable credit, no estate taxes will be due.

When estate taxes are due in the surviving spouse's estate, the remaindermen may argue that, according to Florida law, they are not required to contribute estate taxes attributable to the homestead. (9) However, federal tax law provides the personal representative of the surviving spouse's estate with a claim against the remaindermen for the estate taxes attributable to the homestead. (10) In this situation, the Florida apportionment statute and the federal apportionment statute appear to be in conflict. It is possible, however, to interpret F.S. [section] 733.817(2) and I.R.C. [section] 2207A(a) consistently.

Section 733.817(2) provides that homestead property is exempt from the apportionment of taxes if the property passes to a person to whom inures the decedent's exemption from forced sale. One interpretation is that the decedent in this situation is the surviving spouse, and that the remaindermen inure only to the first spouse to die's exemption from forced sale and not to the surviving spouse's exemption from forced sale. If this is the correct interpretation, then [section] 733.817(2) affords no protection from the apportionment of taxes to the remaindermen. Even if [section] 733.817(2) is read to provide protection to the...