The Florida Intangibles Tax

Florida is one of the fastest growing states in the Union. One of the reasons for its growth is the fact that Florida does not impose an income tax on individuals. This does not mean that Floridians avoid paying all taxes. In fact, many individuals who make Florida their home are subject to an onerous tax: The Florida Intangible Tax!

What is the Florida Intangible Tax?

The Florida Intangible Tax (the Tax) is an annual tax assessed on intangible personal property with a "taxable location" in Florida on Jan. 1. Intangible personal property has a "taxable location" in Florida if it is owned, managed or controlled by a Florida resident.

What types of assets are subject to the Tax?

The types of intangible personal property subject to the Tax are quite broad and include stocks, bonds, securities, interests in limited liability companies, notes, receivables and other obligations for the payment of money, but specifically exclude intangible assets such as checking and savings bank accounts, certain money market accounts, federal debt instruments, Florida state and municipal bonds, interest in non-publicly traded partnerships and certain incentive stock options.

Interest in individual retirement accounts (IRAs) and other qualified plans as well as annuities and life insurance are not subject to the Tax. Additionally, certain interests in trusts are subject to the Tax, whereas, other interests held in properly structured trusts (which are referred in this article as FLITE TRUSTS) may avoid the Tax.

What is the tax rate?

The Tax rate is 1 mill ($1 per $1,000 of value) on the first $100,000 of taxable assets if you file as a single taxpayer (or 1 mill on the first $200,000 for married taxpayers filing jointly.) For amounts in excess of $100,000 for single taxpayers (and $200,000 for married taxpayers filing jointly), the Tax is assessed at a tax rate of 1.5 mills for tax years beginning January 1, 2000. This is a 25 percent reduction in the rate from prior years.

Who is subject to the tax?

In general, Florida residents are subject to the Tax. Florida residents include individuals who have decided to establish residence in Florida. Corporations, partnerships, limited liability companies, limited liability partnerships and other like business entities doing business in Florida are also considered Florida residents for purposes of the Tax.

Are Trusts subject to the Tax?

In general, a trust whether revocable or irrevocable is not subject to the Tax. However, the trustee, settlor (or grantor) and/or the beneficiary of a trust may be subject to the tax if the trustee, settlor and/or beneficiary are considered Florida residents. Conversely, as detailed below, if the trust is properly structured no one will be subject to the Tax.

How to Legally Avoid the Tax?

Essentially, you can transfer your taxable intangible assets to a short-term irrevocable trust located outside of Florida (FLITE Trust) to avoid the Tax. This trust is designed to meet certain "safe-harbor" provisions recently established as administrative rules by the Florida Department of Revenue. Yes, believe it or not, the Florida Department of Revenue actually created these rules in an effort to provide you with rules on how to design and operate the FLITE TRUST to legally avoid the Tax. Our government is providing us with a means of legally avoiding the Tax!

Who are the Parties to the FLITE TRUST Agreement?

The FLITE TRUST must be an irrevocable trust agreement between you, as settlor, and another person as trustee. The fact that the FLITE TRUST must be irrevocable means that you may not have the power to revoke, amend or otherwise change the provisions of the trust. According to the rules, despite your rights to income and principal, as discussed below, you will not be subject to the Tax.

What are your rights to Income and Principal?

You will be able to receive so much of the trust income and principal, as the trustee considers advisable for your health, maintenance and reasonable comfort and best interest. Generally, you are the only beneficiary of the trust during your lifetime. Accordingly, the trustee will most likely distribute income that you will need based upon your normal circumstances.

How Long Must the Assets Remain in the FLITE TRUST?

In order for the FLITE TRUST to be considered a bona fide trust and not an illusory trust, the term should last for a period sufficient to establish that the trustee owned, managed and controlled the assets over the period which includes Jan. 1 of each year. Many planners use time periods varying from one month to about three months. The authors typically use three months, but circumstances may dictate a longer or shorter time frame.

Who may be Trustee of the FLITE TRUST?

In order to achieve tax benefits, the trustee of the FLITE TRUST must not be a Florida resident. This means that the trustee may be an individual who resides outside the state of Florida or corporate fiduciary that does not conduct business in Florida.

Alternatively, a corporate fiduciary from an out-of-state banking institution may serve as trustee, provided, however, such corporation does not conduct business in Florida. Many local corporate fiduciaries have related offices in another state, which are separate entities and will qualify to act as trustee.

Can a partnership or corporation use a FLITE TRUST?

Good question. Although not commonly known, the new "safe harbor" rules were designed not only for trusts and individuals, but they apply evenly to corporations, partnerships, limited liability companies and the like. It appears that the trust, if properly structured, would allow business entities that have paid the tax in the past to legally avoid the Tax!

Once the FLITE TRUST is created, what must I do?

Each year, towards the end of the year, typically sometime between the middle of October to the middle of December, you must transfer you taxable intangible assets to the FLITE TRUST. Typically you will simply need to send a letter to your stock broker, trust company or other financial institution instructing them to transfer your assets from you account to the FLITE TRUST account. Three months after the transfer the trustee will transfer the assets back to you. You should repeat this on an annual basis. You should note that this process is one that you can normally accomplish yourself; typically, on an annual basis it requires little or no attorney time, unless you own certain closely held stock or other troublesome assets to transfer.

Who benefits from a FLITE TRUST?

A properly structured and administered FLITE TRUST allows "potential" taxpayers to legally avoid the Tax. This trust may also be used in conjunction with partnerships and corporations to legally avoid the tax. If you are currently paying in excess of $2,500 of intangible tax, the FLITE TRUST may be the trust for you!

Lester B. Law and Richard S. Franklin are shareholders in the Naples law firm of Myers Krause & Stevens, Chartered. Both are Florida Bar Board Certified Wills, Trusts and Estates Lawyers. Both Lester and Richard have spoken and written frequently on estate planning topics.