Probate Thoughts From The Villages, Florida

I get a lot of questions about estate and inheritance and income taxes for Florida estates.

First, Florida has no separate estate tax; Florida did have what is commonly known as a “sponge” tax which is tied to the Federal Estate Tax; essentially, what happened was, if an estate was large enough to be subject to the Federal Estate Tax, Florida would tax that estate as well; however, it would not increase the total estate tax liability as the Federal estate tax would grant a dollar for dollar credit against the Florida estate tax. Florida did away with this entirely for decedents dying in or after 2005 and now has no sponge tax.
To be honest, the federal estate tax is not an issue for most estates in Florida; the current Federal Estate Tax exemption is $5 million. If your estate is, or may be, subject to the Federal Estate tax, then you should talk to an attorney about how to eliminate or minimize those taxes. There may also be differences where either the person leaving the money is not a United States Citizen, or where one of the people being left the money is not a US citizen; particularly if the spouse is a non-US citizen or if the person leaving the property is a nonresident, non-citizen, i.e., someone who is not a citizen, who is not a permanent resident of the United States, but owns property here such as a vacation home or investment property; if any of these are the case then you should at least talk to an attorney to see whether you need additional estate planning.

Other than that, though, in nearly all cases there is no Florida or Federal estate tax due.

Second, Florida has no ‘inheritance’ tax; though some states will levy a tax not on the gross estate, but upon certain classes of people who receive an inheritance. Who is subject to it, the exemption, if any, and the tax rate varies depending on the state. However, the general rule is that the tax is applicable only in cases where the person who died was a resident of that state, or where a nonresident owned property, real or personal, in that state, such as in the case where a Florida resident owned property in another state.

I’ve mentioned before that if you move to The Villages, Florida from out of state, it is a really good idea to move any bank accounts, investment accounts and any other assets to Florida in order to avoid a claim by the state where you came from that you were still a resident of that state and claims that you might owe income tax in that state; this is another reason to move any assets you can to Florida; If you leave a bank account or an investment account in another state, it is possible that state could claim either a estate tax or inheritance tax under some circumstances. Don’t forget to move or ‘roll over’ retirement accounts such as IRA’s, Keogh Plans and 401 and 403 plans if possible. Talk to an investment professional about how to transfer or rollover these types of accounts; this is not something you want to do yourself, if you don’t know what you are doing you may be at risk of triggering income tax liability if you make a mistake.

Third, Florida has no personal income tax; and as a general rule, most inheritances will not trigger a federal income tax either, although the estate may have to file a federal income tax return. The major exceptions are, first, if the money was “tax deferred” such as under an IRA, 401, 403 or Keogh plan; that money will be taxable as it is drawn out; depending on how the plan was set up and who receives it, there may be ways to avoid having to draw all of the money out all at once; instead, stretching it out over several years. If you have such a plan, you need to talk to an administrator to see if you need to do anything to allow this; if you inherit such a plan, you need to talk to whoever runs the plan before you draw any money out. And, some benefits received from pension plans and retirement distributions may be taxable; the general rule is that if the money would have been taxable to the person who died, it is taxable to the person who inherits it.

Also, any income received by the estate and passed on to the heirs or beneficiaries may be taxable; for example, if the estate inherits property that is rented during the probate, and the rent is paid to the heirs, then income tax may apply.

And, if you sell property that you inherited, income tax may apply; if you inherit a house or stock, and sell the house or stock, then you may have to pay income tax on the sale at the time that you sell it. However, the general rule in this country is that inherited property is treated on a ‘step up’ basis; you do not pay tax on the difference between what the person who died paid for it and what it was sold for; you pay tax on the difference between what the property was worth on the date of death and what you sold it for. Under most circumstances, property that has been held for a period of time has increased in value; so if your mother bought stock at $1 a share in 1970, but it was worth $100 a share when she died in 2012, and you sold it in 2013 for $110 a share, you would owe tax only on $10 a share, not $109 a share. The same rule applies to real estate, and other sorts of investments, such as gold. And, depending on how long you hold the property after you inherit it, you may be able to pay taxes at the “capital gains” rate and not ordinary income tax rate.

Bear in mind, all of this is subject to changes in the law; I don’t know what is going to happen in Washington, DC and there has long been talk of changing the law in this area; if you have a large estate you need to pay attention to the news and contact an attorney if the law changes.

But, in any event, Florida has no income tax on inheritances or estates.

If you have questions about estate planning in The Villages Florida, please contact my office. If you have a need for a probate in The Villages, including Summerfield, Lady Lake, Wildwood, Fruitland Park and Oxford, please call my office.