Estate Planning for Florida Snowbirds - NPEPC for Florida... · Introduction Many advisors find their clients heading south to Florida for the winter. Florida offers retirees warm

Estate Planning for Florida Snowbirds

Copyright, 2014 Boston, Braintree, Mansfield, Providence, Naples

David J. Correira, Esq., MPA Eric D. Correira, Esq., LL.M.

Introduction

Many advisors find their clients heading south to Florida for the winter.

Florida offers retirees warm weather, golf, beaches . . . and the opportunity to significantly reduce one’s overall tax burden

In many instances, the tax savings alone for a client that moves to Florida will cover the expense of living in the Sunshine State

Introduction

Currently, Florida does not impose an estate tax. Up until January 1, 2005, Florida imposed what is known as a sponge or pick-up tax as the state collected the amount allowable as a tax credit against the federal estate tax if paid in state estate taxes.

This credit was phased out under EGTRRA, Florida made no changes in its laws, and as a result currently imposes no estate tax.

In contrast, the state estate tax thresholds in Massachusetts and Rhode Island are $1 million and roughly $920,000 ($1.5 million in 2015), respectively.

Introduction

Also, Florida does not have a state income tax

The obvious climate differences aside, the distinctions between the taxing climates of Florida as compared to Massachusetts and Rhode Island has created an even greater incentive for “Snowbird” retirees to make Florida their state of legal residence.

Florida Trusts & Estates Law FL Elective Share: 30% of “elective estate” (FL

Statute Sec. 732.2065), broadly defined to include: Probate Estate Pay on Death Accounts Revocable Trust Insurance Policies Retirement Plan Death Benefits Certain Pre-Death Transfers

FL Family Allowance: spouses and lineal heirs whom the decedent was supporting or obligated to support can receive an allowance up to, but no more than, $18,000 (lump or periodic payments) during estate administration (FL Statute Sec. 732.403)

Florida Trusts & Estates Law

Rule Against Perpetuities for Trusts: 360 years after creation (FL Statute Sec. 689.225) MA: 21 years after death of person alive at

trust creation or 90 years after creation (M.G.L. ch. 190B Sec. 2-901)

RI: RAP abolished


Personal Representative Fees (FL Statute Sec. 733.617) 3% of first 1M 2.5% of 1M to 5M 2% of 5M to 10M 1.5% of 10M+ Plus further compensation for extraordinary

services (sale of real estate, carrying on business, litigation, etc.)


Estate Attorney’s Fees (FL Statute Sec. 733.6171) 3% of first 1M (approximately) 2.5% of 1M to 3M 2% of 3M to 5M 1.5% 5M to 10M 1% of 10M+ Plus further compensation for extraordinary

services (sale of real estate, carrying on business, litigation, etc.)


Other Notable Aspects: Florida Uniform Fraudulent Transfers Act (FL

Statute Sec. 726.10 et seq.) Florida Trust Code: Modification, Termination,

Reformation Pet Trusts: FL Statute Sec. 736.0408

Requirements for Establishing Domicile In order to establish Florida as one’s legal

domicile, a two part test must be satisfied First, one must be physically present in the

State of Florida, and Second, one must have the subjective

intention of making Florida their permanent place of residence.

Requirements for Establishing Domicile After this two part test is satisfied one should also:

File FL Declaration of Domicile (FL Statute Sec. 222.17)

File Application for FL Homestead Exemption Change Voter Registration Obtain FL Driver’s License and Transfer Automobile

Titles Change Address with Creditors Execute New FL Wills and Trusts Open FL Bank and Financial Accounts File Non-Resident Tax Returns in MA and RI Acquire FL Cemetery Plots

Domicile Caselaw

Deblois v. Clark, 764 A.2d 727 (R.I. 2001) Facts: Married couple originally from RI begins

to spend winters in FL and files nonresident income tax returns in RI that are challenged by the RI Division of Taxation

Issue for Supreme Court: Whether domicile must be proven by “clear and convincing evidence” or only a “preponderance of the evidence” (standard for general tax cases)

Holding: preponderance of the evidence

Domicile Caselaw

Deblois v. Clark (cont.) Applying the preponderance of the evidence

standard, Court held they were FL residents (noting it is a case by case determination)

(1) Place of Abode and (2) Domiciliary Intent Spent majority of the year in FL; valuable

property moved to FL; FL residence more expensive than RI residence; filed for FL homestead; opened FL bank accounts; changed driver’s licenses and car registrations; created FL estate plan; registered to vote in FL; and resigned from RI organizations and joined FL organizations

Jurisdictional Caselaw

Phillips Exeter Academy v. Howard Phillips Fund, Inc., 196 F.3d 284 (1st Cir. 1999) Facts: NH school sues FL charitable foundation for

breach of fiduciary duty Issue: Whether NH federal court had specific personal

jurisdiction over FL charitable foundation Standard for Specific Jurisdiction: 1) asserted claims

must be related to defendant’s contacts with the forum, 2) defendant’s contacts with the forum must show purposeful availment of the benefits and protections of forum state’s laws, and 3) assuming first two requirements met, applying jurisdiction must be “fair”

Jurisdictional Caselaw

Phillips Exeter Academy (cont.) Applying the standard for specific jurisdiction,

Court held that NH did not have jurisdiction to hear the case

Factors: FL decedent left stock in FL company to FL

foundation, directing % of payments to NH school Limited Connections to NH, only: mailing checks,

sending letters, and visiting school; also, any breach of duty would have taken place in FL, result in NH was only an “in-forum effect of an extra-forum breach”

Florida Homestead

The homestead exemption in Florida is provided in Article X, §4 of the Florida State Constitution. The state’s constitution defines homestead property as an individual’s principal place of residence, up to one-half acre within a municipality in Florida, and up to 160 contiguous acres in any county in Florida.

The Florida courts have generously expanded the definition of homestead to include more than the family home; homestead protection now extends to condominiums, mobile homes, and manufactured homes.

Florida Homestead

Florida’s Homestead law sets limitations on protection based on acreage and not monetary value

This allows for individuals to invest millions of dollars into property, large estate homes, or large parcels of land with full homestead protection applying

There is no waiting period for homestead protection Protection applies the moment the property becomes

the resident’s principal place of residence Also, Medicaid applicant’s homestead is an exempt

asset

Florida Homestead

Homestead exemption inures to surviving spouse or the heirs (as defined under the FL intestacy statute) of the owner Ex. Grandfather leaves homestead property to

grandson -> homestead exemption inures to grandson

Issue: How does Windsor change the FL Homestead? It doesn’t, given homestead is a state law issue (i.e. same sex spouse doesn’t count)

Florida Homestead Havoco of Am.., Ltd. v. Hill, 790 So.2d 1018 (Fla.

2001): funds used to purchase homestead property to avoid reach of creditors, Florida Supreme Court finds acceptable but note protection does not apply to assets obtained illegally

Tenancy by the Entirety Exemption: Judgments required against both spouses, jointly, requires: (1) unity of possession, (2) unity of interest, (3) unity of title (same instrument), (4) unity in time (same time), and (5) unity of marriage Westport Recovery Corp. v. Abrams: Circuit Court

opinion found items (3) and (4) not present when husband transferred bank account to he and wife as tenants by the entirety

Florida Homestead

The Rhode Island creditor protection homestead does not require a document to be filed, and protects up to $500,000 in equity (R.I.G.L. § 9-26-4.1)

In Massachusetts: There is an automatic homestead that protects

$125,000 in equity; and There is a declared homestead that protects

$500,000 in equity (M.G.L. ch. 188)

Florida Homestead Issues Regarding Florida Homestead Property

Transferred to Revocable Trust 2001 FL Bankruptcy Court case held that property

transferred to revocable trust not protected because statute requires “property owned by a natural person” (In re Bosonetto)

Subsequent FL Appeals Court decisions have held otherwise, finding that rights retained by grantor sufficient to afford protection (See e.g., Engelke v. Estate of Engelke)

Planning Tip: if client with strong concerns about creditor protection, don’t transfer real estate to a revocable trust

Florida Homestead The second, and more commonly talked about type

of homestead in Florida relates to property tax protection.

Under Florida’s Save Our Homes Act, the assessed value of a Florida homestead cannot increase by more than three percent in any given year or the yearly percent change in the Consumer Price Index for urban consumers.

In order to qualify for homestead protection in the Sunshine State, one must be a permanent resident of Florida, and the homestead property must be the principal place of residence.

Application filed with County Property Appraiser Properly drafted trust can hold homestead property

Florida Homestead

Property not protected under Florida Homestead laws: Property purchased for future residence Rental or investment property Property held or owned by business entities

such as partnerships, LLCs and corporations

Avoiding Estate Tax on the Summer Home The RI and MA estate tax on individuals with

estates exceeding certain threshold amounts applies to property located in the particular state.

An individual who dies as a resident of MA or RI owning only MA or RI real estate and intangible property, is subject only to MA or RI and federal taxes upon their death as all of the property that comprises their gross estate has a MA or RI situs.

Avoiding Estate Tax on the Summer Home The dilemma arises for the Snowbird who

dies owning property in multiple jurisdictions. If the individual is a Florida resident with a summer home in Massachusetts or Rhode Island, then Massachusetts or Rhode Island will still impose their estate tax on the entire estate, including the Florida property.

Avoiding Estate Tax on the Summer Home - Example FL resident does everything right, with the exception

of owning house outright in MA Value of Total Estate Less Deductions (and including

MA House): $1,500,000 Value of MA House, $600,000; Value of FL House,

$600,000; Intangible Property, $300,000 % of Total Estate Attributable to MA: 0.40 MA Estate Tax if MA Resident (MA Real Estate and

Intangible Counted): $38,640 MA Estate Tax if FL Resident (Real Estate Counted

but Intangible Not Counted): $25,760 MA Estate Tax if Additional Estate Planning (Real

Estate and Intangible Not Counted): $0.00

Avoiding Estate Tax on the Summer Home – Use of LLCs, etc… One way to avoid this predicament is for the Florida resident to

convert their real property into intangible property This is accomplished by transferring the out-of-state property to

a Florida entity, such as an LLC, S-Corp, or family limited partnership

Upon transfer the individual no longer owns real property, but rather an interest in a business entity that owns real property

As the business entity is not a Massachusetts or Rhode Island entity, neither state has sufficient contacts with the entity to subject it to taxation

***At one point, the Massachusetts Dept. of Revenue proposed a regulation to cut through such planning unless entity had a “valid business purpose” but the regulation was never made effective

Avoiding Estate Tax on the Summer Home – A-B Trust An LLC or other business entity may not be

practical because of costs, etc… Alternative: FL A-B Trust funded with both FL

and MA/RI real estate On first spouse’s death, fund Family Trust

with the MA/RI real estate (no state estate tax because of exemption)

On second spouse’s death, MA/RI real estate is not part of their estate, instead being owned by Family Trust

Irrevocable Trusts in Florida Because of the protection afforded by the Florida

Homestead to Medicaid applicants, most Florida attorneys do not advise the creation of an Irrevocable Trust for real estate

However, issues arise when a Florida resident returns to MA or RI for long-term care

Best Practice: Create a Florida Irrevocable Medicaid Trust properly structured for MA/RI Medicaid protection and meeting FL homestead requirements, and including FL RAP and spendthrift provisions

***All Florida Trusts and Ancillary Documents Require Two Witnesses

New Florida Power of Attorney Law

Florida’s new Power of Attorney law took effect on October 1, 2011

While all Powers of Attorney executed prior to October 1, 2011 will remain valid, because of drastic changes in the law, it is highly recommended that new documents be drafted


Under the new law, so-called “blanket powers” are no longer effective Most powers of attorney contain blanket powers, which

authorize the agent to act broadly, and to take any reasonable actions that it is believed the principal would take themselves

Such open-ended grants of power are now invalid in Florida An agent is only permitted to exercise authority that is

expressly granted in the document and any additional authority reasonably necessary to give effect to the express grant of authority


Another major change that took effect on October 1, 2011, is that springing powers of attorney are no longer permitted A springing power of attorney is one that only

takes effect upon the principal becoming incapacitated

As a result of the new law, only immediate powers of attorney are effective An immediate power of attorney allows the

agent to act on behalf of the principal at the moment it is signed


In order to avoid issues with banking and investing, the language used in the document should directly reference the statute

While the new law continues to allow two or more individuals to act as co-agents, the new law provides that each co-agent may act independently of the other

Certain powers, commonly referred to as “super powers” know require the principal initial next to each enumeration “Super powers” include the power to alter the

principal’s estate plan, the power to make gifts, and the power to change beneficiary designations


The new statute also requires that the agent attempt to preserve the principal’s estate plan, to the extent actually known by the agent, if preserving the plan is consistent with the principal’s best interest based on all relevant factors

These factors include The value and nature of the principal’s property The principal’s foreseeable obligations Minimization of taxes Eligibility for governmental benefits, and The principal’s personal history of gift making

Unauthorized Practice of Law

The unauthorized practice of law is a common occurrence with New England lawyers and their Snowbird clients

The Florida Bar takes the unauthorized practice of law extremely seriously, and can seek civil injunctive relief, criminal contempt, a monetary penalty, and the payment of costs to the Florida Bar to cover the prosecution of such a claim

Unauthorized Practice of Law In the landmark case State of Florida v. Sperry, 140 So. 2d 587

(1962), the Florida Supreme Court outlined a three part test for determining whether someone was engaged in the practice of law

"We think that in determining whether the giving of advice and counsel and the performance of services in legal matters for compensation constitute the practice of law it is safe to follow the rule that if the giving of such advice and performance of such services affect important rights of a person under the law, and if the reasonable protection of the rights and property of those advised and served requires that the persons giving such advice possess legal skill and knowledge of the law greater than that possessed by the average citizen, then the giving of such advice and the performance of such services by one for another as a course of conduct constitute the practice of law."


The unlicensed practice of law in Florida is a third degree felony (FL Statute Sec. 454.23)

Florida Bar v. Larkin, 298 So.2d 371 (Fla. 1974): Supreme Court of Florida found the preparation of wills and antenuptial agreement by out-of-state attorney to be unlicensed practice of law…suggested that if documents had been reviewed by Florida attorney it would have been permissible BUT Florida Bar has suggested not enough


A common example of the unauthorized practice of law occurs when the New England lawyer, who has just drafted a trust for his client, drafts a deed titling a piece of Florida real estate to the trustee of the newly drafted trust

Again, the Florida Bar takes the unauthorized practice of law extremely seriously, with close to 600 prosecutions occurring in the 2010-11 fiscal year

Questions & Answers

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