The illusory intangible tax trust.

• Author: Richardson, David M.
• Position: Response to Joseph T. Ducanis, Jr., Florida Bar Journal, January 1997 - Includes reply by Ducanis

The article in the January 1997 Journal titled "Aggressive Planning for Florida's Annual Intangible Tax," by Joseph T. Ducanis, Jr., is disturbing from each of a professional, legal, and policy perspective. The article describes a way of avoiding the Florida intangible tax by use of "a special kind of irrevocable trust which has been developed for many clients of [the] author's firm." Intangible assets transferred to such a trust, which he refers to as an "irrevocable intangible tax trust" or "IITT,". prior to the end of a calendar year are said to be not taxable in Florida.

Several of the "key" elements of Mr. Ducanis' tax avoidance plan are i) the trust is a foreign trust with an out-of-state trustee, ii) the taxpayer using the trust does "not have a current right to the [trust's] income," and iii) the taxpayer using the trust "does not retain the right to revoke" it. Florida law has, in fact, long held that neither a bona fide trust of this description nor its Florida beneficiary will be taxed in Florida on the trust's intangible assets. So, the basic structure of Florida's intangible tax law, however avoidance-inviting, is not new, nor is the foreign situs trust approach uniquely available to clients of his firm.

What is new is Mr. Ducanis' willingness to permit the parties to orally modify the written trust agreement, thereby creating a trust that by its written terms may accomplish the tax avoidance objective but that, as orally modified, should be disregarded in determining intangible tax liability. One oral modification is intended to assure potential users of the plan that the trustee will not make investment decisions, but rather will retain the contributed assets for the duration (short though it may be) of the trust. To this end, he recommends structuring the trust "with the proper mix of cooperating parties." In other words, at the time the trust is established, and no matter how broadly the investment powers and responsibilities of the trustee are defined in the trust, it is made clear to the trustee that the trustee is to respect the settlor's goal of retaining the contributed assets. As a result, one of the most important responsibilities of a trustee holding a portfolio of intangible assets--controlling investment decisions--is retained by the settlor (who is a Florida resident).

This is unfortunate for this type of trust, because F.S. [sections] 199.175(1) expressly states that the taxable situs of intangibles "owned, managed, or controlled" by a Florida domiciliary is in Florida. Thus, even if ownership and management of the intangibles by the out-of-state trust is respected, because ownership, management, and control are stated in the disjunctive in the statute--any one of them occurring in Florida on January 1, places the situs of the intangibles in Florida.

The second substantive, oral modification is designed to address the fact that many taxpayers would not be willing to transfer their intangible assets to an irrevocable foreign trust, with an out-of-state trustee, which trustee has discretion as to the timing of the distribution of the income and assets, and discretion as to trust investments. To deal with this problem, Mr. Ducanis suggests using "a `friendly' trustee who ... can be relied upon to distribute the trust assets out to the grantor/beneficiary after the 30-day period (even though the trust instrument does not require such distribution)."

The problem with the "friendly" trustee approach is that the client now has a written trust instrument that says one thing--i.e., that the client cannot revoke the trust--and an oral modification of the trust under which the "friendly" trustee will return the assets after the 30 days, even though the instrument does not require the assets to be returned. For all practical purposes, and particularly given the short term of the trust, the client exercised the right to revoke the trust at the time the trust was established.

Furthermore, the question of whether a trust is irrevocable must be answered under the law of the state in which it is created. Generally, trust law is supportive of the irrevocability of trusts, for they are deemed to be irrevocable unless the settlor has expressly reserved the right to revoke. But, consider...