The Ins and Outs of the Florida Estate Tax
Lawyers regularly are asked to deal with property owned by a decedent, and to help clients’ estates comply with the Florida estate tax. In 2001, Congress enacted and President Bush signed into law the Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub. L. No. 107-16) (the “tax act”)1 which directly affected the Florida estate tax. The new estate tax law changes the responsibilities of personal representatives of estates under both federal and Florida law.
This article will discuss which decedents are subject to the Florida estate tax. Also, the article will explain a personal representative’s responsibilities and describe how the tax act changed these responsibilities.
Florida Estate Tax and Responsibilities of Personal Representatives
The Florida estate tax is directly linked to the federal estate tax. Therefore, if no federal estate tax is due, then no Florida estate tax would be due.2 F.S. Ch. 198 provides in part that a resident decedent is subject to Florida estate tax equal to the credit for state death taxes provided in Internal Revenue Code §2011, less any death taxes paid to another state. F.S. §198.03 provides that a nonresident decedent is subject to the Florida estate tax on the pro rata share of the credit for state death taxes provided in IRC §2011, based upon the ratio of the taxable Florida property over the federal gross estate.
Personal representatives may be called on to: 1) file Florida estate tax returns; 2) request refunds of Florida estate tax; 3) claim credits for prior transfers of tax in related estates; 4) comply with tax recapture provisions; 5) seek deferral of estate tax payment in certain circumstances; 6) receive release from estate tax liens on property; and 7) claim benefits of Florida generation-skipping transfer tax provisions. The personal representative3 of a decedent’s estate is required to file an estate tax return with the Florida Department of Revenue (DOR) within nine months following the decedent’s death4 and pay the Florida estate tax due.5 However, the requirement to file an estate tax return with the DOR is contingent upon the value of the federal gross estate. If the value of the decedent’s federal gross estate is equal to or exceeds the decedent’s remaining applicable exclusion amount,6 then the personal representative is required to file the estate tax return with the DOR. If the value of the decedent’s federal gross estate is less than the decedent’s remaining applicable exclusion amount, then the personal representative may either be required to file a Preliminary Notice and Report form DR-301 for estates of decedents who died prior to January 1, 2000, and obtain a nontaxable certificate, or file an Affidavit of No Florida Estate Tax Due form DR-312 for estates of decedents who died after December 31, 1999. This affidavit should be filed in the county in which the decedent owned real estate.7
After the personal representative files the Florida estate tax return with the DOR, the DOR will require a copy of the Internal Revenue Service federal estate tax closing letter to determine the amount of the Florida estate tax due. The federal estate tax closing letter provides the credit for state death taxes and the amount of the credit for prior transfers. The personal representative also needs to provide a copy of any audit adjustments made by the IRS regarding the federal estate tax, credit for state death taxes, and credit for prior transfers. In addition to the information received by the IRS, the personal representative needs to submit a copy of the certificate(s) of payment of death taxes it receives from other states to determine the amount of the Florida estate tax. Upon receipt of this information, the DOR will determine the final Florida estate tax due and issue a final certificate to the estate once all taxes have been paid to the DOR.
• Requesting Refunds
F.S. §198.29(1) provides that the DOR will issue a refund to the personal representative of the estate due to the overpayment of the Florida estate tax. F.S. §198.29(2) provides a four-year period in which to request the refund from the date the estate paid the tax to the DOR. If the determination of the federal estate tax takes longer than the four-year period, the personal representative can request the refund of Florida estate tax within 60 days of the federal administrative or judicial determination of the federal estate tax. This issue can be tricky, because the personal representative may have overpaid the Florida estate tax due to the credit Florida allows for the payment of death tax to another state pursuant to F.S. §198.02. Therefore, if a resident decedent owned property in another state and is required to pay death tax to that state, the personal representative should comply with the requirements of F.S. §198.29(2) in order to obtain a refund from the DOR.
If the decedent owned property in multiple states at his death, the personal representative may have claims made by multiple states regarding the decedent’s state of domicile. F.S. §198.015 defines whether a decedent was a Florida resident at his death. F.S. §198.015(2) provides that a determination of a probate court regarding the decedent’s domicile is not conclusive proof regarding the residency of the decedent. If the personal representative pays the estate tax to Florida based upon Florida residency and another state challenges the decedent’s residence, then the DOR must be allowed to either join the action regarding the decedent’s domicile or be named in the action. If the personal representative pays the other state’s death tax and seeks a refund from the DOR, the DOR cannot refund the Florida estate tax paid if the DOR has not been allowed to either join in the action or be a party to a settlement of the domicile dispute between the estate and the other state.8
• Claiming Credits for Prior Transfers
Another area the personal representative needs to address is the credit for tax on prior transfers provided in IRC §2013. The credit for prior transfers allows the personal representative to claim a credit against the decedent’s federal estate tax liability for federal estate taxes which were paid in another estate in which the current decedent was a beneficiary. For instance, suppose a father died with an estate that paid federal estate tax. His son, the only beneficiary of father’s estate, dies within two years of the father’s death, and is required to pay federal estate tax. In this case, the personal representative of the son’s estate would be entitled to claim the credit for prior transfers on the son’s federal estate tax return.
There is no statutory provision that allows the son’s personal representative to take a credit for prior transfers against the Florida estate tax. The Florida Supreme Court in Dickinson v. Maurer, 229 So. 2d 247 (Fla. 1969), held that to the extent that the federal estate tax (without taking into consideration the credit for state death taxes) is consumed by other credits (i.e., the unified credit and the tax on prior transfers), no Florida estate tax is due. For example, if the son’s federal estate tax is $2,000,000, the unified credit is $210,000, the credit for prior transfers is $1,600,000 and the credit for state death taxes is $320,000, then the amount due to the DOR is $190,000 ($2,000,000 – $210,000 – $1,600,000). In this example, if the credit for prior transfers equaled or exceeded $1,790,000, then no Florida estate tax would be due. If in the example the credit for prior transfers were less than $1,600,000, then the DOR would be entitled to more Florida estate tax capped by the credit for state death taxes.
The personal representative should note two items regarding the credit for prior transfers. First, IRC §2013 limits the credit which may be taken on the decedent’s federal estate tax return to the amount of federal estate tax actually paid to the IRS withouttaking into consideration the amount paid directly to a state. For instance, if the father’s estate paid $1,600,000 to the IRS and $300,000 to Florida, the maximum credit for prior transfers is $1,600,000, not $1,900,000. Second, the IRS limits the credit for prior transfers listed on the IRS estate tax closing letter to the amount that can be taken in conjunction with the credit for state death taxes. For instance, if the son’s federal estate tax is $2,000,000, unified credit is $210,000 and credit for state death taxes is $320,000, then the IRS estate tax closing letter will list the credit for prior transfers as $1,470,000 ($2,000,000 – $210,000 – $320,000) instead of $1,600,000.9
• Tax Recapture Provisions
The IRC provides that estate tax may be subject to recapture in certain circumstances. IRC §2032A(c)(1) imposes additional federal estate tax if specific property is sold within 10 years of the decedent’s death or if the property no longer qualifies under §2032A within 10 years of the decedent’s death. IRC §2032A(c)(4) provides that the additional federal estate tax must be paid and the return must be filed within six months of the event.10 Once the additional federal estate tax is due, the DOR is entitled to the credit for state death taxes which corresponds to the amount of the additional federal estate tax due. The additional federal and Florida estate tax due is computed using a formula in IRC §2032A and is tied to the IRC that was in effect at the decedent’s death. Therefore, the additional Florida estate tax due is computed using the credit for state death taxes in effect at the decedent’s death. For example, if the decedent died in 1999 and the property is sold in 2005, then the personal representative would calculate the additional Florida estate tax due in 2005 using the 1999 credit for state death taxes.
• Qualified Domestic Trusts
IRC §2056A provides for qualified domestic trusts. The IRC allows an unlimited marital deduction for property that is transferred from husband to wife or wife to husband.11 However, the IRC limits the use of the unlimited marital deduction in IRC §2056 to property transferred to a U.S. citizen. Therefore, if a husband at his death transfers property to his wife who is a foreign national, the IRC imposes a federal estate tax.
IRC §2056A allows the personal representative to make an election to defer the federal estate tax currently due and the Florida estate tax which is allowed pursuant to the credit for state death taxes. If the requirements of IRC §2056A are met, then the federal estate tax and Florida estate tax is deferred. IRC §2056A(b)(5) provides that the additional federal estate tax shall be paid on the 15th day of the fourth month of the calendar year following the distribution from the trust to the surviving spouse. IRC §2056A(b)(3) exempts distributions of income made to the spouse and specific hardship principal distributions made to the spouse. All other distributions are subject to the federal estate tax and the Florida estate tax. The last payment of additional federal estate tax and the final return reporting the federal estate tax would be made either upon the final distribution of principal from the trust to the surviving spouse, or following the death of the surviving spouse. The formula for computing the additional federal estate tax due is provided in IRC §2056A(b)(2). The formula is based upon the IRC that was in effect at the decedent’s death. The DOR requires the personal representative to file a copy of all federal estate tax returns reporting the payment of the additional federal estate tax on IRS form 706-QDT with the DOR. The DOR also requires the personal representative to pay the additional Florida estate tax due based within the period provided in IRC §2056A.
• Deferring Payments of Tax
IRC §6166 permits the personal representative to elect to defer the payment of federal estate tax for five years and pay the estate tax over a 10-year period. The election is limited to specific types of assets that were owned by the decedent at his death. In addition, the personal representative may be entitled to request an extension to pay the federal estate tax pursuant to IRC §6161. If the personal representative elects either IRC §6166 or 6161 treatment, then the personal representative must notify the DOR and pay the Florida estate tax in the same manner that the personal representative is paying the IRS. The personal representative should also note that if he chooses to pay the IRS in full, then he cannot pay the Florida estate tax pursuant to IRC §6161. F.S. §198.15(1) only permits the deferral of paying Florida estate tax if the IRS allowed the estate to defer the payment of the federal estate tax.
• Receiving Release of a Lien
The personal representative may need to sell property of the estate and receive a lien release. F.S. §198.22 provides a 12-year lien on the decedent’s gross estate. The lien is to be satisfied upon the payment of the Florida estate tax due. The personal representative may request a release of lien from the DOR on form DR-308 Application for Waiver and Release of Florida Estate Tax Lien. F.S. §198.22 and Fla. Admin. Code Rule 12C-3.012 control the lien release process. If the decedent is a Florida resident, the DOR may release the lien without requiring payment of the Florida estate tax if less than 50 percent of the aggregate Florida real estate is sold.12 If more than 50 percent of the aggregate Florida real estate is sold, the DOR will require a deposit of a pro rata share of the Florida estate tax due.13 If the decedent did not reside in Florida, then the personal representative must pay 16 percent of the value of the Florida real estate that is sold unless the estate can demonstrate that a lower amount is due to the DOR.14 If the personal representative of a Florida resident chooses to sell, mortgage, or encumber the Florida real estate and receives adequate and full consideration in money or money’s worth, the lien is divested from the real estate and attaches to the consideration received.15 In addition, the personal representative can choose to obtain a court order divesting the lien, providing the court order directs the personal representative to use the proceeds to pay administrative expenses of the estate.16
• The Generation-Skipping Transfer Tax
The Florida generation-skipping transfer (GST) tax is contained in F.S. §198.021 for resident decedents and §198.031 for nonresident decedents. Like the Florida estate tax, the Florida GST tax for resident decedents is based upon the GST credit allowed in IRC §2604, less GST tax paid to another state that also qualifies for the credit in IRC §2604.17 F.S. §198.031 provides that a nonresident decedent is subject to Florida GST tax on the pro rata share of the credit for GST tax provided in IRC §2604 based upon the ratio of the Florida property over the federal gross GST.
Changes to Florida Estate Tax Due to the Tax Act
The Tax Act phased down the credit for state death taxes in IRC §2011 for decedents who died during calendar years 2001 through 2004. In addition, the Tax Act increased the unified credit allowed in IRC §2010. Based upon theses changes, the Florida estate tax was reduced or may have been eliminated for decedents who died during calendar years 2001 through 2004.
The Tax Act eliminates the credit for state death taxes for decedents who die after December 31, 2004, but before January 1, 2011. During this period both resident decedents and nonresident decedents who own Florida property at their death will no longer be subject to the Florida estate tax. The period is limited to December 31, 2010, due to the sunset provisions contained in §901 of the Tax Act. Therefore, unless further action is taken, the Florida estate tax will apply to resident decedents and nonresident decedents who own Florida property and die after December 31, 2010.
In light of the changes made by the Tax Act, what will a personal representative be required to do during the period January 1, 2005, through December 31, 2010? A personal representative will be required to file a Florida estate tax return for decedents who are required to file a federal estate tax return pursuant to F.S. §198.13(1), even though no Florida estate tax is due. For decedents who die before January 1, 2005, the personal representative will be required to file a Florida estate tax return and pay any Florida estate tax that is due. Therefore, the personal representative will need to review: 1) when did the decedent die; 2) did the decedent own property in multiple states; 3) has the IRS issued a estate tax closing letter, audited the estate and made audit changes; 4) is the estate subject to recapture provisions contained in IRC §2032A or 2056A; 5) was the estate entitled to a credit for prior transfers; 6) is there a dispute amongst the states regarding where the decedent was domiciled at his death which will affect the Florida estate tax and result in a change to the amount of Florida estate tax previously paid; 7) is the personal representative continuing to administer the estate and will the DOR issue a release of lien; and 8) has the Florida estate tax been paid in full or is the tax being paid pursuant to IRC §6166 or 6161?
The Tax Act also eliminated the Florida GST tax for decedents who die during the period January 1, 2004, through December 31, 2010. A personal representative also will need to determine whether a decedent who died prior to January 1, 2004, is subject to the Florida GST tax. If the decedent was subject to the tax, the personal representative will be required to file a return and pay the tax. If no tax is due, the personal representative has no responsibilities to the DOR.
Conclusion
A lawyer who represents a personal representative of an estate needs to understand the Florida estate tax and GST tax. There are many situations where a personal representative may be required to comply with the provisions of F.S. Ch. 198. Even though the Tax Act eliminated the Florida estate tax for decedents who died during the period January 1, 2005, through December 31, 2010, a personal representative may be required to file a return with the DOR regardless of whether tax is due. In addition, a personal representative may be confronted with estates where the decedent died prior to January 1, 2005. Therefore, lawyers who represent a personal representative need to keep a checklist of the personal representative’s obligations regarding the Florida estate tax and GST tax.
1 All references made to the Internal Revenue Code shall mean the Internal Revenue Code of 1986, as amended.
2 The author notes that there are circumstances in which no federal estate tax would be due because of the application of the credit for prior transfers contained in I.R.C. §2013. This issue will be addressed later in the article.
3 Fla. Stat. §198.01(2) defines personal representative as the personal representative, executor, curator appointed by a court and any person who is in possession of the decedent’s property.
4 Fla. Stat. §198.13(1).
5 Fla. Stat. §198.15(1).
6 I.R.C. §2010.
7 Fla. Admin. Code R. 12C-3.0015(2)(a)1. and 2.
8 Fla. Stat. §198.29(5).
9 The amount of the federal credit for prior transfers is calculated as follows: $2,000,000 federal estate tax less $210,000 unified credit equals $1,790,000. The credit available is limited to the $1,600,000 provided in the example.
10 The Florida estate tax return and the payment of the additional Florida estate tax will be due at the same time the additional federal estate tax is due. See Fla. Stat. §§198.13(1) and 198.15(1).
11 I.R.C. §2056.
12 Fla. Admin. Code R. 12-3.012(3)(a).
13 Id.
14 Fla. Admin. Code R. 12-3.012(3)(b).
15 Fla. Stat. §198.22.
16 Id.
17 Fla. Stat. §198.021.
Benjamin A. Jablow is a board certified tax attorney who is an assistant general counsel for the Florida Department of Revenue, where he focuses primarily in the corporate income tax and estate tax. He received his J.D. from Creighton University and his LL.M. in taxation from the University of Florida.
The statements made in this article do not reflect the official position or opinions of the Florida Department of Revenue.
This column is submitted on behalf of the Tax Section, William D. Townsend, chair, and Michael D. Miller and Normarie Segurola, editors.
