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The Florida Intangible Tax–The Real Voluntary Tax

Tax

As a result of recent changes to the Florida Intangibles Tax (FIT), the legislature has all but repealed the FIT. The skeleton is all that remains of the once dreaded and costly FIT. Essentially, the legislature has reduced the rate by one-third, completely removed trusts from the FIT roles, and created a voluntary tax for most other taxpayers. That’s right, the current reach of the FIT is so narrow and easy to avoid, it can be called a voluntary tax.

The Old Law
In general, a taxpayer (which includes individuals, corporations, partnerships, limited liability companies, estates and trusts) was subject to the tax if the taxpayer had a taxable situs in Florida. Of course, this required that the taxpayer owned, managed, or controlled taxable intangible assets1 on January 12 of any particular year. For instance, if an individual owned taxable intangible assets and such person was a Florida resident, he or she would be subject to the FIT at the then prevailing rate of tax.3
With respect to trusts, special rules applied. For trusts, unlike other entities, the determination of whether a trust had a taxable situs in Florida was based upon whether 1) the trustee had a Florida situs,4 or 2) the trust had a Florida resident who had a taxable beneficial interest.5

The New Law
The new law, which became effective July 1, 2000,6 reduces the tax rate from 1.5 mill to 1 mill (i.e., a one-third reduction of the rate). It also removes the provisions that cause a trust to be taxed as a result of a trustee causing the trust to have a situs in Florida. What remains is that the trust assets are subject to the FIT if a Florida resident had a taxable beneficial interest in the trust.7
• The Beneficial Interest Test
A Florida resident has a beneficial interest in a trust if such person has a current right to income, and, either 1) a power to revoke the trust, or 2) a general power of appointment, as defined in IRC §2041(b)(1).8 As discussed in more detail below, although not enumerated in the statutes or administrative rules, I believe that the right to revoke test applies to situations in which grantors are also beneficiaries, and that the §2041 requirement applies to situations in which the grantor is not the beneficiary.
• The Current Right to Income
Neither the statutes nor the Florida Administrative Code explains what constitutes a “current right to income.” However, a plain and literal reading of the statute leads me to believe that a discretionary right in the trustee to distribute income would not satisfy this prong of the test. This is supported by some of the language in a few Florida Department of Revenue technical assistance advisements (TAAs) and some of the language in the now partially obsolete safe harbor rules.9 For example, in a typical education trust for a grandchild, the trustee (not the grandchild) has the discretion to distribute income to the grandchild until a specified age (e.g., 18 or 21), and thereafter the income must be distributed. Before the specified age, the grandchild would not have a current right to income and, therefore, the grandchild would not have a taxable beneficial interest, even though the grandchild may have a testamentary general power of appointment.
A different case may arise if the trustee had full discretion to distribute income and the beneficiary and the trustee were one and the same person. Perhaps, in that case, the “right to income” provision would be satisfied. The control as trustee may be tantamount to giving the beneficiary/trustee the current right to income.
Right to Revoke
A question arises whether having the naked power to revoke a trust without a “current right to income” would create a beneficial interest in a Florida beneficiary. This is not evident by simply reading the statute. However, the DOR, in its recent promulgation of the rules applicable to the FIT, has indicated that when a grantor retains the right to revoke a trust, the grantor would be subject to the FIT.10 As indicated above, before the recent statutory change, from a purely statutory analysis, the trust’s assets could only be taxed through the trustee or the beneficiary, and not through the grantor. After the amendment to the statutes, the only way to be taxed is if the beneficiary has a beneficial interest. One could argue that the DOR’s regulatory rule is a mere extension of the beneficial interest rule in that it merely elaborates upon the statutory rule. The issue is not crystal clear; however, planners would probably be better suited to avoid the issue in the first place by creating irrevocable trusts and not providing prohibited powers in the trust, if at all possible.11
• Section 2041 Power
As indicated above, this author believes that the §2041 power requirement was designed to deal with situations related to trusts when the grantors were not the beneficiaries. The rationale for this is that under §2041 and the Treasury Regulations promulgated thereunder, arguably a grantor cannot give himself or herself a general power of appointment.12 Thus, it seems that this second prong should not apply to cases to determine whether a grantor has a beneficial interest in a trust.
Clearly, this is not a problem when the grantor is not a beneficiary of the trust. If the beneficiary and the grantor are different, one merely reviews the trust provisions to determine if the beneficiary has a current right to income coupled with the §2041 power. If either is missing, then there is no “beneficial interest.”

Planning to Avoid the Tax
There are a number of vehicles that may be used to avoid the tax. The two most common are to use either an out-of-state limited partnership or a special trust designed to avoid the tax. Although the primary focus of this article is to address the use of the trusts (the FLITE13 trust) for tax avoidance purposes, a brief mention of the issues surrounding the use of a limited partnership is warranted.
• The FLITE Trust
Even before the recent statutory change, the FLITE trust was used to avoid the FIT. Typically, the trust was drafted to meet the safe harbor requirements under the recently promulgated Administrative Code rules.14 Under the old law, the trusts were drafted in a manner to prohibit any Florida trustee from owning, managing, or controlling the trust, and to prohibit any beneficiary from having a beneficial interest in the trust. As a result of the recent statutory change, the trust merely must prohibit a Florida resident from having a beneficial interest. There is really no concern about the trustee—or is there?
•Grantor as Trustee
An issue arises whether a grantor of a FLITE trust could create a trust in which he or she is the trustee. Simply put, would one have an “income interest” coupled with a power to revoke or a §2041 power, if he or she is the grantor and trustee? There is no clear authority to allow this, but also there is none that does not allow this.
An issue that muddies the water is what effect does what this author calls the “regulatory rule” have on this? As discussed above, there is no clear statutory provision that taxes a grantor of a trust. However, when the DOR promulgated new rules governing trusts that are designed to avoid the FIT,15 it added the regulatory provision that taxes grantors.16 Under the DOR’s rule, it appears that a grantor could not be a trustee of a FLITE trust, without subjecting the trust’s assets to taxation. However, with the repeal of the trustee provisions, one could argue that this would effectively make obsolete the part of the rule in which a grantor could not act as trustee. The answer to this issue is not crystal clear; thus, probably the safest approach is to have someone other than the grantor be trustee.
This writer understands that there may be a TAA, which will clarify this issue. However, at the time that this article was sent for publication, the TAA has not yet been published. Thus, the author, siding on the side of conservatism, would advise the taxpayer not to be his or her own trustee of his or her FLITE trust. If the taxpayer is married, the spouse could serve as trustee. This appears to be a good solution for the married taxpayers. If the taxpayer is single, the taxpayer’s local corporate fiduciary, other Florida family members, or some other trusted person may serve as trustee.
• Using Last Year’s FLITE Trust
For those taxpayers who used FLITE trusts last year, a question arises whether they can use the same trust again this year.17 The short answer is “most probably.” There are two caveats. First, if the taxpayer continues using the out-of-state trustee, it is important that he or she ensures that the laws in the state of the out-of-state trustee would not subject the trust’s assets to that state’s tax regime. Second, if the taxpayer wishes to use the trust but change the out-of-state trustee by selecting a Florida trustee, one should carefully review the trust to see if this is permissible. It should be noted that many well-crafted trusts specifically prohibited the use of a Florida resident trustee. Thus, it may not be possible to replace the current out-of-state trustee with a Florida trustee.
• Create a New FLITE Trust
The better approach is to prepare new FLITE trusts for those who have old FLITE trusts. This assumes that the client wishes to go through the cost and work associated with terminating the old FLITE trust and creating a new FLITE trust. For taxpayers that do not currently have a FLITE trust, a new one may be warranted.
From a practitioner’s standpoint, under the new statutory regime the old FLITE trust should be revised to permit a Florida resident to act as trustee. One benefit of this is that it is usually easier to coordinate efforts with in-state trustees versus out-of-state trustees. However, creating the new FLITE trust requires the opening of new accounts for the new trust and all of the formalities that are associated with creating and funding a new irrevocable trust.
• Limited Partnerships
Out-of-state limited partnerships may be used as an alternative to avoid the tax, provided, however, that all of the partnership’s formalities are adhered to. Provided further, that no one who is a Florida resident actually owns, manages, or controls the partnership in Florida.18
Quite often, estate planners use family limited partnerships for estate planning purposes. One of the tax benefits under the current federal tax laws is that the taxpayers could receive significant discounts for estate and gift tax purposes. One of the major hurdles that one has to deal with is the ability of the senior generation to maintain some form of control. If the senior family member is a Florida resident, it would be very difficult for the senior member to give up control for intangible tax purposes, yet retain control of the partnership otherwise. Recall that in order to avoid the FIT, the partnership has to be an out-of-state limited partnership and no Florida resident could effectively manage or control the partnership. The only way to do this properly is by having non-Florida persons control the partnership. This, however, often conflicts with the desire of the senior family member, who is a Florida resident, and who does not want to relinquish control.
A possible solution is to use a Florida limited partnership and combine it with a FLITE trust. The structure of the partnership would be no different than an out-of-state limited partnership. A Florida corporation would be the general partner, and the senior family members (or their revocable trusts) would be the initial limited partners. This obviously will not avoid the FIT; however, it will be properly structured for estate tax purposes. To avoid the FIT, simply have the Florida limited partnership create a FLITE trust in which the partnership is the grantor and the beneficiary of the trust.
Nothing in Florida’s statutes or Administrative Code provides that the use of a FLITE trust is limited to individuals. Even though there is some reference in the Administrative Code to the masculine gender, the rules were never designed to apply only to individuals.
The bigger issue to address is whether the use of a FLITE trust in combination with a family limited partnership would trigger any adverse federal income tax ramifications. Making the FLITE trust a grantor trust for income tax purposes should avoid any adverse federal income tax consequence.
It should be noted that Treasury Regulations §1.671-2(e), written in 1956, provides that the term grantor “includes” a corporation. Thus, it illustrates that the IRS contemplated that any entity, whether a corporation or partnership, may create grantor trusts. An example of this is the Rabbi trust, which is typically created by corporations. Thus, a partnership could create and fund a FLITE trust to avoid any FIT that the partnership would otherwise be subject.
It should also be noted that the senior generation members should use a FLITE trust for their other taxable assets. Further, if they utilize such a trust, they must remember to transfer their interests in the corporate general partner to the FLITE trust. It would be unnecessary to transfer the limited partnership interests to the senior taxpayer’s personal FLITE trust, since limited partnership interests such as these are not subject to the FIT.19
• Limited Liability Company
Assuming that the senior generation taxpayer chooses to use a Florida limited liability company for estate planning purposes, the limited liability company would also be able to use the FLITE trust. However, in this case, since a limited liability company interest is analogous to an interest in a corporation (as opposed to an interest in a partnership), the senior taxpayer’s interest in the limited liability company should be transferred to that taxpayer s personal FLITE trust.
• Other Trusts Not Subject to the FIT
Other implications of repealing the trustee provisions are enormous. This now allows many trusts that have been traditionally subject to tax not to be subject to the tax in the future. Examples of this would include the qualified terminable interest property (QTIP) trust,20 the typical applicable credit trust (also sometimes still referred to as the credit sheltered trust, the $600,000 trust, or the family trust),21 GST-exempt dynasty type trusts, and charitable remainder trusts.
• QTIP and Other Trusts
The typical QTIP trust is drafted to provide all income to the surviving spouse and remainder to the decedent spouse’s descendants (usually on a per stirpes basis). The terms of the trust must give the spouse all of the income (i.e., mandatory income); thus, the surviving spouse has a current right to income. However, the trust by definition is irrevocable at the decedent spouse’s death. Further, by definition, the trust could not give the surviving spouse a §2041 power, otherwise it would not qualify as a QTIP trust. Before the recent statutory change, these trusts were usually taxed under the trustee rule, since quite often the surviving spouse, who was a Florida resident or a Florida corporate fiduciary, would be the trustee. Thus, under the old rules, the QTIP trust would be subject to the FIT; whereas, under the new rules, the trust would not be taxed.
The same would hold true for the applicable credit trust and the GST-exempt dynasty type trusts. Care, however, should be taken with those trusts that may not be GST exempt, or those trusts that give the beneficiary a general power of appointment. To overcome the FIT issue, one could provide for discretionary income. However, caution should be used in drafting such provisions, especially in long-term trusts. One should not let the proverbial tax tail wag the proverbial non-tax dog!
• Funding of Revocable Trusts
The new statutory change makes funding revocable trusts before death or the funding of revocable trusts immediately upon death more important. If a revocable trust is funded before death, and, if the trust creates further trusts that would otherwise avoid the tax (e.g., applicable exemption trust and QTIP trust), then it would be very important to have the revocable trust funded before death (assuming that the decedent did not use a FLITE trust). The simple reason for this is that, upon death, the beneficiaries of the trust would have no “beneficial interest”; thus, trust assets would not be subject to the FIT. Alternatively, if the revocable trust is not funded before death (i.e., assets are held in the taxpayer s individual name), then upon death, the assets become part of a probate estate. Unless the personal representative can quickly transfer assets from the probate estate to the trust estate, the assets would be probably be subject to the FIT, because a will typically does not provide that the personal representative could create a FLITE trust. Therefore, if there is a probate estate, in order to avoid paying any FIT, the personal representative should attempt to transfer the taxable intangible personal property to the revocable trust (if possible).
• FLITE Trust Duration
A point not specifically discussed in the DOR’s rules or the statutes is the length of time that the assets transferred into the FLITE trust must remain. Before the issuance of the administrative rules in 1998, the rule of thumb for the duration was four months. The reason for this is that there were many TAAs that permitted a four-month trust. After the rules were issued, many practitioners reduced the time periods to three months and lesser periods. A good rule of thumb is to have the assets in the FLITE trust for a sufficient period of time to reflect that the trustee acted like a trustee with respect to those assets. Accordingly, some believe that the period should be no shorter than a month. However, there is no authority for this position and, as with all opinions, there are exceptions.
• Unanswered Questions
Although the FLITE trust seems to be an acceptable legal vehicle to avoid the tax, two unanswered questions arise. Is there a concern that a grantor may be deemed to have a beneficial interest by the fact that a creditor may be able to reach the corpus of an irrevocable trust created by the grantor for the grantor’s benefit (e.g., a FLITE trust)? In a FLITE trust, the trustee of a trust must transfer the property back to the grantor (or the grantor’s revocable trust) at the end of a specified period. Is the right to receive the property at the end of a specified period not an intangible asset?

The Good, The Bad, and The Unknown
The good news is that the rate has been reduced to one mill and is anticipated to be reduced even lower (i.e., for those taxpayers who do not wish to voluntarily avoid the tax). The other good news is that the tax is essentially voluntary, and can be avoided by using either the FLITE trust or an out-of-state limited partnership. The bad news is that for those who have been advising clients for over the past five years that “there should be no other changes,” along comes an unexpected change. The other bad news is that for taxpayers who have properly drafted FLITE trusts in existence, which properly prohibited Florida trustees, the taxpayers will have to consider whether they wish to have new trusts drafted, or whether they wish to keep the old FLITE trusts. The unknown is what the legislature plans to do with the tax. Will it repeal the tax? There have been some informal rumblings that the tax would be repealed sometime in the next year or two. However, the more recent rumor is that the tax may stay in place, but that the rate would be reduced to zero mill. The reason for reducing the rate, as opposed to repealing the tax, is that it allows the tax regime to stay in place, in the event that there is a revival of the tax. For instance, if the federal estate tax were repealed, the state death tax would effectively be repealed, and, thus, it would eliminate a huge base of tax from Florida’s treasury, the result of which may necessitate the revival of the FIT. This, again, is mere speculation and is not the focus of the article. Who knows what the legislature will do? The remaining unknowns are the answers to the unanswered questions.
What is known is that some old adages are not always true. Yes, all die, but may not have to pay taxes, at least not the Florida intangible tax. So go ahead, make a taxpayer’s day: Explain how the FLITE trust will allow the taxpayer to legally avoid the FIT. q

1 Fla. Stat. §199.032 (1999); Fla. Admin. Code Ann. r. 12C-2.004(1) (1998). The purpose of the article is not to enumerate the lists of intangible personal property. See generally Fla. Stat. §199.175 (1999); Fla. Stat. §199.185 (1999); and Fla. Admin. Code Ann. r. 12C-2.002 (1998), which provides comprehensive lists. Additionally, the FDOR provides a comprehensive a list on its website at http://sun6.dms.state.fl.us/dor/taxes/ippt.html .
2 The tax is assessed based upon the just value of assets owned on January 1 each year. Fla. Stat. §199.052(1) (1999).
3 Most recently, in 1999, the tax was 2 mill, in 2000 it was 1.5 mill, and now, as a result of a statutory change, it is 1 mill. See Fla. Stat. §§199.032 and 199.052 (1998); Fla. Stat. §§199.032 and 199.052 (1999); and 2000 Fla. Laws ch. 173, §7. Depending upon the year, the rate was graduated depending upon whether the taxpayer was an individual or an entity, and whether the individual was married or single. Moreover, some modest exemptions were provided (again depending upon the taxpayer s status). The purpose of this article is not to delve into that minutia.
4 In the event that there was more than one trustee, then the determination of whether the trust was sitused in Florida depended upon who had management and control of the assets. The new law deleted this provision; thus, it is unnecessary to go into detail how the rules worked. See generally Fla. Stat. §199.052(5) and Fla. Admin. Code r. 12C-2.006(3).
5 See Fla. Stat. §§199.052(5) (1999) and 199.023(7) (1999).
6 2 000
Fla. Laws ch. 173, §14.
7 The term “beneficial interest” is defined in Fla. Stat. §199.023(7) (1999). Before the legislative change, the statute made reference to “foreign” trusts. The new law deletes the term “foreign.” See 2000
Fla. Laws. ch. 173, §1.
8 Fla. Stat. 199.023(7)(1999); see supra note 6 and accompanying text.
9 See, e.g., Technical Assistance Advisement Nos. 96C-2140, 96(C)-2108R, 96(C)2-130.
10 Fla. Admin. Code r. 12C-2.006(4) (1998).
11 The prohibited powers are enumerated at Fla. Admin. Code r. 12C-2.006(4)(a)– (d) (1998).
12 See Treas. Regs. 20.2041-1(b)(2).
13 The FLITE Trust s name was simply derived from the Florida Intangible Tax Exempt Trust. It has no special meaning. Other planners and banking institutions call the trusts different names. Regardless of the name, they essentially serve one major purpose—legal avoidance of the FIT.
14 Fla. Admin. Code r. 12C-2.006 et seq.
15 Fla. Admin. Code r. 12C-2.006(4) (1998)
16 Id.
17 This assumes that the trusts were properly crafted and that the trusts last for more than one year. It is the author’s opinion that practitioner should draft a FLITE trust(s) that could be used year after year; it would be in the client’s best interest.
18 See Fla. Admin. Code r. 12C-2.0061. See also Technical Assistance Advisement 96(C)2-142; however, note that this TAA was issued before the new rules were promulgated.
19 Fla. Stat. §199.185(1)(c) (1999).
20 This is a trust created under the statutory provisions under I.R.C. §2056(b)(7), where it provides an income interest for a surviving spouse. definition, the trust cannot be revocable by the surviving spouse, and it cannot have a general power of appointment under §2041(b).
21 These trusts are created to take advantage of using a decedent’s applicable credit amount under §2010 of the Internal Revenue Code. In general, many estate planners provide the surviving spouse with the income interest, and the remainder either is held in further trust for descendants or is distributed to the descendants outright. To be effective, if the trust is held for the surviving spouse, it cannot be revocable and it cannot give the surviving spouse ( i.e., typically the income beneficiary) a general power of appointment as such term is defined under §2041 of the Code.

Lester B. Law is a shareholder at the firm of Myers, Krause & Stevens, Chartered, Naples. He is a board-certified wills, trusts and estates lawyer. Mr. Law received his J.D. from the University of North Carolina at Chapel Hill and his LL.M. from the University of Florida College of Law graduate tax program. Mr. Law is coeditor of this column with Michael D. Miller. This column is submitted on behalf of the Tax Section, Marvin Gutter, chair.

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