Tax Considerations for a Move to the Sunshine State

     

Florida has long been known as a hot-spot for retirees and snowbirds to move for its sunny weather and beautiful beaches. In recent years, due to a number of factors, there has been an additional influx of individuals and families moving to the Sunshine State, some of which is tax-driven. Notwithstanding the significant benefits that Florida offers to individuals and businesses, there are concrete plans and actions that should be undertaken to establish Florida domicile for legal and tax purposes. In this podcast, Jennifer Wioncek, Partner in Bilzin Sumberg’s Tax & Private Wealth Group, and Lauren Kurtz, Attorney in Bilzin Sumberg’s Tax & Private Wealth Group, discuss the planning considerations that potential and recent movers to Florida should think about it with a focus on tax and estate planning matters.

Transcript:

WIONCEK: Hello, everybody. I'm Jennifer Wioncek, a Partner in Bilzin Sumberg's Tax and Private Wealth Group. I'm excited to welcome you to a discussion on planning considerations for moving to the state of Florida. We're having this timely discussion because of the dramatic rise in business and wealth migration to all parts of South Florida from other parts of the country over the past few years, a trend that only accelerated with the onset of COVID-19 as many professionals sought to work remotely from Florida's year-round, outdoor environment. As part of the discussion, I have the pleasure of one of my colleagues joining me today.

KURTZ: Hello, everyone. I'm Lauren Kurtz, a member of the Tax and Private Wealth Group at Bilzin Sumberg. Today, Jennifer and I are going to briefly cover the following topics. First, we'll discuss the driving factors for individuals and businesses in deciding to move to Florida. Next, we'll discuss the importance of the concept of domicile. Then we'll discuss some of the different factors that are considered to perfect a change of domicile. Lastly, we'll discuss other planning considerations you should keep in mind before or soon after making your move.

While Florida's year round warm weather is an attractive driving factor, recently since the 2017 tax cuts and jobs act imposed a $10,000 SALT deduction limitation, we've seen an influx of individuals moving to Florida from high tax states. Besides the SALT deduction limitation, another driving factor for moving to Florida has been due to the pandemic and the increased flexibility to work from home, making relocating today easier than ever.

One of the other main driving factors encouraging businesses and families to move here is that Florida is considered a tax friendly jurisdiction. For individuals, there's no state income tax and there's no inheritance or estate tax. Additionally, Florida homeowners enjoy certain property tax benefits on their Florida homestead. For businesses, Florida has a generally low corporate tax rate compared to other states. Currently, Florida's corporate tax rate is about four and a half percent at the end of 2021 and five and a half percent starting January 2022.

Businesses operating as pass through companies, however, are not subject to Florida's corporate tax, making operating through a limited liability company, S corp, or partnership attractive alternatives depending on your business. Additionally, the overall costs of operation in Florida such as office space costs are generally going to be less than that seen in high tax jurisdictions. All of these benefits however, are generally only available to Florida residents. As Jennifer will discuss, establishing your Florida domicile is critical for various reasons.

WIONCEK: Thank you. So why do we care about domicile? Domicile is typically used for determining one's legal residence. Legal residence is what is usually necessary to be afforded any special benefits or protections in that jurisdiction, such as the ones that were previously mentioned by Lauren in relation to Florida. While each jurisdiction may have a slightly different explanation for what is domicile, domicile is quite simply the place where a person has a fixed abode with the present intention of making it his or her permanent home. This is a subjective test based on objective factors, which we'll cover here in a minute. But what is important to understand is that because it is subjective in nature, that means there is a risk of different outcomes being applied by different states.

On the other hand, though, because it is a fact intensive test, it does mean that there's the opportunity to plan yourself accordingly. It is universally accepted that an individual can only have one domicile, which leads us to what is probably the more critical part of planning for a change of domicile to Florida and that is breaking your domicile status. This is because domicile continues until it is abandoned and superseded by a new one, and we'll come back to why breaking residence is important later. What steps to abandon a prior domicile should be discussed, though with local counsel. But generally speaking, this is going to be the reduction of connections to that other jurisdiction. With that, this is a good segue for Lauren to discuss some of the common factors considered for domicile.

KURTZ: Yeah, thanks Jenn. It's important to understand that no one factor is completely determinative to establish new domicile. Usually courts will evaluate all relevant facts and circumstances. Some of the more obvious factors involved to establish domicile include obtaining your Florida driver's license and updating your vehicle registration. Some factors that aren't as obvious that courts have examined in recent case law include where you have certain subscriptions or memberships and where your loved ones are located.

For example, in one Tax Court case from New York, the taxpayer claimed a change in domicile from New York to Paris after reuniting with his high school sweetheart, even though he kept certain ties to New York, including keeping his apartment. The court found that the taxpayer sufficiently broke his ties to New York based on his efforts to be with his loved one in Paris.

Another example where an individual wasn't as convincing includes a creditor protection case where the debtor purchased a home in Florida and claimed it to be as homestead exempt from creditors. Although the debtor did obtain his Florida driver's license, library card and voter registration card, evidence of the debtor's gym records showed that he worked out in California 300 of the 365 days in 2015. The court in that case found that the evidence presented demonstrated the debtor didn't actually break his ties to California.

Because there's no single determinative factor to establish domicile, it's recommended that one should try to eliminate any ambiguities. Certain steps you can take to break domicile in another jurisdiction and establish Florida domicile may include filing a declaration of domicile with the Florida county that you reside in. It can also be beneficial to confirm whether a similar declaration of abandoning domicile is available in your prior home state. You should also surrender any homestead benefits you may have in your prior home state and apply for homestead exemption on your Florida residence. It's important to note that your homestead benefits will not apply to your Florida residence until January 1 of the following year after you establish homestead if you meet the March 1 application deadline.

I'd like to also point out that updating your estate planning documents to conform to Florida law can also help break ties with your prior domicile. Before or soon after making your move to Florida we recommend updating or possibly even preparing for the first time, estate planning documents to be consistent with Florida law. It's important to note that probate is generally tied to one's domicile. Probate, in a nutshell, is a legal proceeding to administer assets and estate with court supervision. As an estate planner, I work with clients to help structure their assets in a way to avoid probate, which can often be a timely and costly process.

If you're moving to Florida and are planning to keep your vacation home or other property in another state, updating your estate plan upon your move can help eliminate the need for ancillary, or out of state, probate proceedings upon your death. This planning may require retitling assets to be owned by either a revocable trust, a local LLC, or another entity, or it could involve retitling of assets to be jointly owned by you and your spouse. All of which require coordination with local counsel to ensure that such planning is tailored to carry out your unique estate planning objectives.

It's important to briefly mention again that other states like New York and Connecticut have state estate tax and such considerations should also be given to plan for local assets you may own in those jurisdictions. Another reason we recommend your estate plan should conform with Florida law is that in Florida there are specific requirements as to who can serve as the personal representative or an executor of an estate. Generally only Florida residents or closely related family members can serve as your personal representative. Florida law also has certain restrictions and protections relating to estates. For example, Florida prohibits against the disinheriting of your spouse. So under Florida law, a surviving spouse has the right to an elective share, allowing them the right to elect to receive 1/3 of the deceased spouse's estate.

Also, in addition to homestead creditor protections I mentioned earlier, Florida's constitution generally prohibits one from devising homestead property if you're married or have minor children. Lastly, although it is enforceable in other states, no contest clauses are not permissible in wills and trusts under Florida law. So this generally means that you cannot include a provision that disinherits someone if they contest your will or trust in court. Jennifer, are there any other state planning considerations we should mention?

WIONCEK: Yes, another interesting twist here in the estate planning world is individuals who may be coming from jurisdictions with a community property system, such as California. Community property for those not familiar is a marital property regime where each spouse owns a 50% undivided interest in marital assets. Florida, by comparison is a separate property state, which means married couples say whatever is mine is mine, and whatever is yours is yours. Often what we see from couples migrating from California with existing estate planning documents is that they will have a jointly settled revocable trust to hold their community property assets with special provisions to deal with the succession of those assets on a spouse's death. Such type of trust is not common, though, for Florida residents, because again, we're a separate property system, and usually each spouse will have their own separate revocable trust.

So we as advisors are often faced with decisions on whether such trust can be replicated for Florida law purposes, while still preserving the community property nature. Florida, though, is waiting on the passage of a new law called the Community Property Trust Act, which will give Florida advisors more guidance on how to preserve such existing joint trusts being migrated from other jurisdictions. As of today, the bill has been presented to the governor so it should be enacted any day now. So again, updating your estate planning documents is not only important for establishing your change of domicile, but can be critical in terms of preserving your succession plan for the reasons that we just went through.

Before we wrap up today's session, though, we want to touch upon a few additional important planning considerations. As we said, COVID only accelerated a trend of moving to Florida in the past few years. Most, if not all of the situations we have seen are related to states that have state income taxes. This is one of the primary reasons for sufficiently breaking your prior domicile status because I think it's only to be expected that we will see certain states scrutinize an individual's change of domicile status, as such states need to recover from already large deficits, which were further increased after COVID 19.

Anecdotally, we know that New York is very aggressive on these matters. For example, if you can support you shifted your domicile, you could still be considered what's called a statutory resident for New York state income tax purposes, if you continue to own real estate in New York and spend at least 183 days there. So continuing to maintain a residence in the former domiciled jurisdiction is going to post some degree of risk, which means that the other factors that we mentioned earlier, need to be thoroughly reviewed and bolstered as much as possible to support a change of domicile status to Florida.

Along these same lines, the past year and a half we've also seen many individuals from other jurisdictions working remotely from Florida, some of whom have decided to remain in Florida and either switch employment, or have been allowed to be the new so called Florida affiliated office. While Florida does not have a state income tax system, as Lauren mentioned, the issue is that personal service income is typically sourced to where the service was performed. So for those working remotely, that would presumably mean that their compensation should be sourced to Florida. However, New York and other jurisdictions with state income tax systems may still try to argue that such income is taxable in their state based on an argument of temporary absence. So if one is going to try and argue that they change their domicile to Florida to defeat such sourcing risks, we would expect there to be some cases where there is a challenge to domicile status, particularly when there are continued connections to that other jurisdiction, such as an available residence.

Last but not least, and maybe one of the other key planning considerations around change of domicile planning, is timing. If persons are moving from another state to Florida, we need to review the whole picture and consider if the timing of the move is particularly important for any reason. The person may want to change their domicile quickly, for example, to mitigate against state estate taxes on death, or they may want to try to put themselves in a better creditor protection situation by acquiring their homestead. The most famous example of this being OJ Simpson's move to Florida.


On the other side of the equation, though, it may be tax efficient to slow down the process to take advantage of certain tax benefits. For example, if the former residence is going to be sold, it may be important that the existing home continues to be your primary or principal residence for a certain number of years, in order for any built in gains to be excluded from federal taxation under the principle home exclusion.

So we believe the trend of businesses and individuals leaving high tax states will continue for the foreseeable future while we wait to see what happens with potential federal tax law changes under President Biden's administration. What we do know is that none of the existing proposals out there repeal the $10,000 SALT deduction limitation with the possibility of the federal estate tax exemption going down and in such states such as New York and California considering changes to their state rules and increasing taxes for their wealthy constituents, Florida will continue to be a tax friendly jurisdiction. While we could spend several hours discussing these issues, this concludes our discussion today on planning considerations for a change of domicile to Florida. I want to thank Lauren, for joining me today.

KURTZ: Thank you, Jennifer. It's been a pleasure. To our audience, thank you for tuning in. We hope that you found this discussion to be informative and helpful in your decision to move to Florida. We look forward to bringing you more informative and timely podcasts on important issues to you, which can be found on the Bilzin Sumberg Lawcast at bilzin.com.