Miami residents have a long history of escaping to cooler climates during the summer months.  While the advent of central air conditioning has made regular visits to the north more of a luxury than a necessity, vacation homes in such exotic locations as North Carolina, Maine, Vermont, Massachusetts and New York remain as popular as ever.  Many Miami residents also own out-of-state real estate for reasons other than vacations, with many owning property for rental income, long-term investment, or present/future use by family members.

Review Your Florida-Centric Estate Plans

Florida resident owners of out-of-state real estate and tangible personal property (such as furniture, artwork, automobiles and boats) may be surprised to learn, however, that without proper planning their spouses or children may pay a steep tax price to inherit the property when the owner dies.  Many owners may be even more surprised to learn that their current Florida-centric estate plans do not include planning to avoid or postpone the tax.

This unexpected tax trap is a result of the “decoupling” of state and federal estate taxes which was fully phased in by 2005.  While most states, such as Florida, let their state estate tax lapse at that time, a few – including notably the states listed above – continue to tax both residents of their state and owners of real and tangible personal property located in their state.  Some states, such as Pennsylvania, have separate inheritance taxes to consider.  Dying while owning property in these states will frequently result in a state estate or inheritance tax being assessed on the full value of the real and tangible personal property located in the state (unreduced by mortgage indebtedness) even in cases where careful planning has avoided federal estate tax being assessed due to the marital deduction or otherwise. 

To add insult to injury, it may also be necessary to hire local experts to pass the title to the property through local probate.  In some cases, ownership of the property at death could spark a state income tax or estate tax audit as budget-strapped states attempt to bring the deceased owner into the fold (or back into the fold in the case of Florida residents who may have moved south to escape such taxation to begin with) for state income tax purposes.

Plan Ahead to Avoid the Tax Trap

With proper planning, state estate and inheritance tax may be postponed or eliminated altogether.  While the great variety of state laws and personal situations ensures that there is no “one size fits all” solution, many property owners choose to avoid the state estate tax issues by gifting, or selling, the real property (and tangible property contents) to an irrevocable grantor trust while leasing the property back at fair market value.  This planning may save state estate and inheritance taxes while providing an effective platform for Federal estate tax reduction and protection from creditors for the current owner and future generations.  In other words, the hidden tax trap, once sprung, may become the cornerstone of a solid planning structure.