Many retirees move to Florida from other states and keep a home in their former state. These individuals, known as “snowbirds,” may face unexpected taxes on their properties in their former state. Changes to estate tax laws in 2001 and the creation of a new tax regime in 2010 could affect their estates. Before EGTRRA, there was a credit allowed against the Federal estate tax for any estate taxes paid to a state. EGTRRA reduced this credit and eventually repealed it, replacing it with a deduction for death taxes actually paid. This change could result in additional estate tax being owed to the state where property is located. Many northern states have estate or inheritance taxes independent of the federal estate tax. Most states that have an estate tax used to pick up the SDTC amount allowed as an offset to the Federal estate tax. When someone passes away, their property may be subject to an inheritance tax, which is a tax on the transfer of property after death. The tax is based on who receives the property and their relationship to the deceased person. In some states, the tax is paid by the estate of the deceased person, and if there’s not enough money in the estate, the person receiving the inheritance may have to pay the tax. If someone in Florida leaves property to a relative in a state with an inheritance tax, the recipient doesn’t have to pay the tax in their home state. If someone who doesn’t live in a state owns property there when they pass away, the state may impose a tax on that property. Sometimes it can be tricky to figure out what counts as property in that state. For example, in New York, owning a cooperative apartment doesn’t count as owning real estate for tax purposes. Also, if someone owns property with others but they operate it as a partnership, the state may see their ownership as an intangible asset instead of real property. This can affect taxes and how the property is titled. If a Florida resident owns property in a state with different estate tax laws, it can affect how much estate tax they owe. For example, if a Florida resident dies with a $3 million estate, including $500,000 of property in another state, the estate tax in that state could be calculated differently. This could mean the estate owes more or less in taxes, depending on the specific laws in that state. If someone died in 2003, their estate would owe $834,000 in federal estate tax after the allowable deduction. $91,000 of that would go to the 50 percent reduced state death tax credit (SDTC) and the northern state would get $30,333, with Florida getting the rest. If the northern state could prove the person was a resident there and not in Florida, the northern state would get $163,800 and Florida would get nothing.
In 2004, the northern state tax would stay the same but Florida would get less at $15,167 and the federal estate tax would be reduced to $659,500.
In 2005, the federal estate tax would go up to $680,743 and Florida would get nothing.
From 2006 onwards, the federal estate tax may be reduced because of a higher exemption amount. Florida gets nothing, so the focus would be on the northern state tax of $30,333 or possibly having to pay the higher resident estate tax of $163,800. When you have a mortgage on property in the northern state, it can make your estate tax higher. This is because the state calculates the tax based on the total value of the property, not just what it’s worth after subtracting the mortgage. For example, if your property is worth $800,000 but you still owe $300,000 on the mortgage, the state will calculate your tax as if the property is worth the full $800,000. This can make your tax bill go up. If someone who lives in Florida dies and owns property in New York, they might have to pay a lot of extra taxes. This is because New York has a rule that can make the estate tax really high, even if the person didn’t own a lot in New York. This can be a big problem for people who have property in both Florida and New York when they pass away. If you live in a different state but own property in New York when you die, New York may charge a tax on that property. They calculate the tax based on the value of the property in New York. For example, if you have $10 million worth of property in New York, you might have to pay about $21,352 in taxes. This is because New York charges a tax of about 10.7% on the value of the property in the state. The New York tier two tax can result in very high estate taxes for a person who dies owning property in New York, even if they were a resident of Florida. This is because both New York and Florida claim taxes on the estate, which can result in New York claiming a lot more than it should. This can be a big problem for people with property in both states. It’s important for people to consider where they live and how it affects their estate taxes. In some cases, people may choose to become a resident of Florida to lower their estate tax. Determining whether a person is a resident or nonresident for estate tax purposes depends on their domicile. Factors like where they live, work, own property, and spend the most time are considered. If someone with a Florida domicile still owns property in another state, they might have to pay estate taxes there too. To avoid this, they can convert the type of property they own in the other state so it’s not taxed there. This can help them avoid taxes and legal issues after they pass away. Conversion transactions involve turning real property into intangible personal property by putting it into entities like corporations or partnerships. This can have tax implications and other costs, but if done carefully, it can turn real estate into an intangible asset in Florida. Putting real estate into a revocable trust may not help with nonresident estate taxes, as the assets are still considered part of the deceased person’s estate. If someone owns property in a northern state and may have to pay a nonresident death tax, they might consider getting rid of the property by giving it as a gift to family or putting it into a trust. But they need to think about the tax consequences first. They could also sell the property to a family member, but they might have to pay taxes on any profit from the sale. It’s important to consider all the options and their financial effects before making a decision. If someone living in Florida owns property in another state, they may have to pay estate tax on that property when they die. To avoid this, they can try to change the type of property or get rid of it. If that doesn’t work, there are a few other options to explore. When someone dies, their will may create a trust to save on taxes. One option is to pay the New York estate tax and put property in the trust, if it’s expected to go up in value. Another option is to structure the trust so it qualifies for special treatment that may save on state estate taxes. It’s important to consider the specific laws and circumstances before deciding what to do. The “wait and see” approach is an easy and flexible way for a surviving spouse to handle their deceased partner’s assets. It involves leaving all assets to the surviving spouse and allowing them to decide later which assets should go into a credit shelter trust. This approach has drawbacks, such as the surviving spouse changing their mind or unintentionally jeopardizing the disclaimer. It’s important for Florida residents to plan carefully, especially if they own property outside of Florida, to minimize or avoid additional taxes. Overall, proper planning can help reduce tax exposure. This excerpt contains information about estate planning and tax laws. It includes references to specific legal cases and sections of the Internal Revenue Code. The author is a lawyer who is knowledgeable about these topics and has a background in taxation and estate planning.
Source: https://www.floridabar.org/the-florida-bar-journal/the-new-york-and-other-states-death-tax-trap/
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