WHAT OHIO LAWYERS NEED TO KNOW ABOUT ESTATE PLANNING FOR CLIENTS DOMICILED IN FLORIDA

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1 WHAT OHIO LAWYERS NEED TO KNOW ABOUT ESTATE PLANNING FOR CLIENTS DOMICILED IN FLORIDA DAVID J. SIMMONS 4690 MUNSON ST., N.W. CANTON, OH I. FLORIDA DOMICILE CHECKLIST The law respecting domicile is rather subjective and the ultimate answers to questions raised are frequently not very definitive. The reason is that the determination of domicile is basically a factual finding of the intent of the individual, based upon the external and objective acts which he takes. Thus, there are numerous factors involved, none of which is clearly determinative of the result in and of itself, but all of which have a bearing in pulling together an analysis of "all of the facts and circumstances." In order for an Ohio domiciliary to establish a new domicile in the State of Florida, he should do the following types of things: Purchase and establish a residence in Florida. File the Declaration of Domicile in the Circuit Court in the county of new residence certifying that he is a permanent and bona fide resident of Florida. Register to vote in Florida. Vote at the next possible election in Florida. Surrender his Ohio driver's license and license plates. Obtain a new Florida driver's license. Register his car in Florida and use Florida license plates. Obtain a new car title in Florida when he purchases a new car. File his Federal income tax return with the District Director in Atlanta (where Florida residents file their Federal income tax returns) showing the new Florida address. File Florida state taxes as a domiciliary of that state. Cease filing Ohio resident income tax returns. Have a new Will/Trust drafted by counsel licensed to practice in Florida and recite in its first paragraph that the testator is now domiciled in Florida. Establish a banking relationship in Florida. 1

2 Establish a stock broker relationship in Florida. Close his Ohio checking and brokerage accounts. Open a safe deposit box in Florida. Use the new Florida address on all types of mailings, including billings, credit cards, magazine subscriptions, tax returns, etc. Publicize the new address as your permanent residence by professional cards, announcements, etc. Notify his insurance company to send premium notices to his new address. Spend a significantly greater portion of each year in Florida; that is, be physically present a majority of the time. Do not spend more than 120 nights in Ohio in a calendar year, if it can be avoided. Dispose of any home in Ohio. Establish a relationship with a physician and have medical records transferred. Generally establish religious, social and professional relationships in the new community, including joining social organizations, a church, and local lodges or professional societies. Resign from, or change to non-residence status for clubs, churches and social organizations in Ohio. All of these kinds of actions or activities have a bearing on the ultimate legal question which is the intent to reside permanently in the new location. No one of them is of overriding importance, but taken as a whole, these are many of the various factors which are generally reviewed and analyzed. II. INCOME TAXES Florida has no state income tax system. Instead it levies an intangibles tax, a tax imposed on intangible assets owned by an individual domiciled in Florida. Florida's intangible tax is an annual tax based on the current market value, as of January 1, of intangible personal property owned, managed, or controlled by Florida residents or persons doing business in Florida. The tax applies to intangible assets such as the following: Stocks Mutual funds Bonds 2

3 Loans Money market funds Notes Accounts receivable Interest in limited partnerships registered with the Securities and Exchange Commission. Every Florida resident who (on January 1) owns, manages, or controls intangible personal property must file an Intangible Tax Return for Individual and Joint Filers (Form DR-601I). Florida residents whose intangible assets are held by security dealers and/or stock brokers are also required to file. Intangible property exempt from taxation includes the following: Money (including cash-on-hand and in checking or savings accounts), certificates of deposit (CDs), annuities, and cash values of insurance policies; All intangible property held in an individual retirement account (IRA) qualified under section 408, U.S.I.R.C., as amended; All intangible property held in an employee retirement plan qualified under section 401, of the U.S. Internal Revenue Code, (I.R.C.) as amended; Deferred compensation plans offered to government employees when qualified under section 457 of the Internal Revenue Code; Bonds, notes, and other obligations issued by Florida or its municipalities, counties, and other taxing districts, or the U.S. government and its agencies, territories, and possessions (if these investments are held in a fund, they may be taxable); Interest in a limited partnership not registered with the Securities and Exchange Commission; Interest in a general partnership; Franchises; Notes and other obligations for payment, except bonds, to the extent secured by liens on real property; Two-thirds of accounts receivable arising out of trade or business; and A trust contributing 95% of its income to a federally exempt organization under section 501(c)3, I.R.C., as amended. Beginning in 2001, the Florida legislature reduced the rate of tax to $1.00 tax for every $1, of intangible assets. Certain exemptions apply for intangible tax purposes. For individual filers, the first $20, of total taxable assets are exempt 3

4 from the intangibles tax. For joint filers, the first $40, of total taxable assets are exempt from the intangibles tax. Although legislation was enacted in 2001 to increase the individual exemption to $250, and the joint exemption to $500,000.00, in late December, 2001, the Florida legislature delayed this increase in exemptions. The exemption amounts currently remain as in the past, $20, for individuals and $40, for joint returns. This action was taken in response to the deteriorating economy and subsequent reductions in tax revenues. Since January 1, 2001, the Florida Department of Revenue has permitted the use of so-called Flint trusts which are shortterm irrevocable trusts designed to completely eliminate the Florida intangibles tax. The Trustee of the irrevocable trust typically holds the assets from November, or at the latest early December, until several months after year-end, and then the Trustee returns the assets to the client (leaving, perhaps $ in the trust so that it remains in existence to be funded again in subsequent years). In determining whether it makes economic sense to create the trust, it is important to factor in the cost of establishing the trust, any Trustee fees, and the fact that the intangibles taxes paid represent an income tax deduction for federal income tax purposes. The following chart illustrates the income tax savings by choosing a Florida domicile and also the use of a Flint trust. Intangible Asset Income at 4% rate of return Ohio Income Tax for Single Taxpayer Florida Intangible Tax for Single Taxpayer Florida Intangible Tax with Flint Trust $1,000,000 $40,000 $1,264 $980 0 $2,000,000 $80,000 $3,335 $1,980 0 $3,000,000 $120,000 $5,883 $2,980 0 $4,000,000 $160,000 $8,643 $3,980 0 $5,000,000 $200,000 $11,403 $4,

5 III. ESTATE TAXES For many years Florida attorneys have benefited from the half truth that Florida has no estate tax. In fact Florida like most states enacted a sponge or pick up tax. As a result of this until the passage of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGGTRRA), a taxpayer had to have taxable assets in excess of $3,420,000 before Florida and Ohio estate tax rates equalized. This resulted in there being differences in state estate taxes for individuals with assets of $3,420,000 or less. Affluent individuals in Ohio with assets in excess of $3,420,000 saw no state estate tax reduction by changing their domicile to Florida. One of the ways of paying for Federal estate tax relief as part of EGGTRRA 2001was the phase out of the state death tax credit available against federal estate taxes. As the following chart illustrates, the tables have now turned such that a high net worth individual dying in Ohio pays significantly more in Ohio estate taxes as compared to an individual dying domiciled in Florida subject to the Florida Pick-Up tax. This table assumes the Ohio estate tax is uncoupled from the repeal of the federal credit for state death taxes. Net Estate Florida Pick Up Tax Ohio Estate Tax $ 1,000, $ 44,700 $ 2,000,000 $ 49,800 $ 24,900 0 $ 114,700 $ 4,000,000 $ 140,200 $ 70,100 0 $ 280,400 $ 6,000,000 $ 255,400 $ 127,700 0 $ 510,800 $ 8,000,000 $ 386,600 $ 193,300 0 $ 773,200 $ 10,000,000 $ 533,800 $ 266,900 0 $ 1,067,600 These differences in tax rates will become even more pronounced when the federal credit for state estate taxes is phased out in Because Florida is constitutionally 5

6 prohibited footnote-from enacting an estate tax, in 2005 Florida s claim of not having an estate tax will become a reality. IV. REAL ESTATE TAXES Florida has real estate tax laws, commonly referred to as the homestead exemption which protect individuals domiciled in Florida from being taxed out of their home as a result of rapidly appreciating real estate values. The homestead exemption reduces the assessed value by $25,000 and further limits future increases in the assessed value to 3% per year. For clients with a significant investment in a Florida residence, the cumulative effect of the 3% cap on increases in fair market value can be significant over time. Another benefit of being domiciled in Florida is that a homestead or residence is exempt from most claims of creditors. V. MISCELLANEOUS DRAFTING ISSUES A. Execution - Self Proving Affidavit Under Florida law, a will must be "proved" or authenticated to be admitted to probate. If a will does not contain self-proof, one of the witnesses must certify to the will's authenticity. Because finding a witness may be difficult, most drafters include a self-proof statement. The self-proof form has been re-written to require an acknowledgment, by Testator, rather than an oath or affirmation. Also, a will which complies with the self-proof provisions of the state where executed is considered to have complied with Florida law. A will may be self-proved by an acknowledgement substantially in the following form: ( ) STATE OF FLORIDA COUNTY OF I,, declare to the officer taking my acknowledgment of this instrument, and to the subscribing witnesses, that I signed this instrument as my will. Testator 6

7 We, and, have been sworn by the officer signing below, and declare to that officer on our oaths that the testator declared the instrument to be the testator's will and signed it in our presence and that we each signed the instrument as a witness in the presence of the testator and of each other. Witness Witness Acknowledged and subscribed before me by the testator,, who is personally known to me or who has produced as identification, and sworn to and subscribed before me by the witnesses,, who is personally known to me or who has produced as identification, and who is personally known to me or who has produced as identification, and subscribed by me in the presence of the testator and the subscribing witnesses, all on. Notary Public B. Tangible Personal Property A will may refer to a written statement or list that provides for the disposition of specific items of tangible personal property. The list must be signed by the testator and it may be changed or amended at any time without affecting the validity of the will. The supplemental list must be specifically referred to in the will. The list may not be used to dispose of property used in a trade or business. If more than one list exists, then to the extent of any conflict, the provisions of the most recent list are deemed to revoke any inconsistent provisions of a prior list. ( ). C. Springing Durable Power of Attorney Permitted in Florida effective 1/1/2002. D. Personal Representative Florida statutes limit who can serve as Personal Representative. Any person who is a resident of Florida is qualified to act as Personal Representative, Trustee and Guardian unless convicted of felony, mentally or physically unable to perform duties, or under age 18. F.S and

8 A nonresident of Florida cannot serve as a Personal Representative unless a family relationship as specified in the statute exists. The Probate Code provides that individuals residing outside of Florida may serve as Personal Representatives or Guardians so long as they are (1) the legally adopted child or adopted parent of the decedent; (2) related by lineal consanguinity to the decedent; (3) a spouse or a brother, sister, uncle, aunt, nephew or niece of the decedent, or someone related by lineal consanguinity to any such person; or (4) the spouse of a person otherwise qualified under F.S of F.S All trust companies incorporated in Florida may qualify as a Personal Representative, and all state banking and state savings association, national banking and national savings associations qualified to exercise fiduciary powers may act as a Personal Representative. F.S (1). (Sample provision) Fiduciary Appointments. I appoint my spouse, JOAN B. SMITH, and NATIONAL STATE BANK OF TALLAHASSEE (or its successors) to be Co- Personal Representatives (herein collectively the Personal Representative) under this my Will. No Personal Representative shall be required to furnish bond or other security in any jurisdiction. E. Fiduciary Powers F.S provides for statutory fiduciary powers. F. Residential Real Property This outright bequest of the home to the spouse complies with the Florida Constitution and Probate Code relating to the disposition of the homestead. If the home is placed in the testator's individual name or trust for purposes of estate equalization, and the home is supposed to be added to the credit shelter trust at the time of death, a post-nuptial agreement waiving each spouse's right to homestead will have to be completed. (Sample provision) Residential Real Property. I devise to my spouse, if she survives me, my real property used by us as our principal Florida residence, together with the buildings and the improvements thereon ant the insurance policies relating thereto. G. Trust Execution If a trust contains testamentary aspects, the trust agreement must be signed with the formalities of a Will pursuant to F.S (1)(g) and

9 H. Perpetuities Saving Clause. The Florida Legislature amendment F.S by modifying the statutory Rule Against Perpetuities by increasing the maximum permissible period from 90 years to 360 years. (Sample provision) Perpetuities Saving Clause. Notwithstanding any other provision of this instrument, the trusts created hereunder shall vest in and be distributed to the persons then entitled to the income form such property within the time period specified under Section of the Florida Statutes, as amended, unless vested sooner as provided in this instrument. The Trustee shall distribute the remaining portion of trust property outright to the persons then entitled to receive the income from the trust in the proportions in which they are beneficiaries of such income, and if no proportions are specified, then in equal shares