Estate Issues For Foreign Citizens Owning Property In Florida

Foreign visitors to Florida are finding it to be a great time to purchase real estate.  Between the favorable exchange rate and the bargain basement prices of Florida properties, the atmosphere for investment is ideal.

However, foreign buyers face a whole set of issues that U.S. Citizens don’t.  The first issue is probate and estate planning.  The United Kingdom doesn’t recognize Florida property in its will and probate proceedings.  As a result, British citizens must have a Florida will in addition to their estate planning documents in the U.K.  Canadian citizens may not need a separate Florida will, but their real estate here will be subject to Florida probate – even if their estate is already probated in Canada.

In Florida, probate is expensive (it can cost between 4% and 8% of the value of the Florida property) and is time consuming.  Many foreign property owners wish to avoid Florida probate if at all possible.  Some add their children’s names on the title of the property.  While this may create a right of survivorship, meaning the property automatically passes to the remaining owners on the death of one;  it can create other problems.  All owners are required to sign a deed transferring title or a mortgage.  This could be cumbersome and difficult to arrange.  If one of the children is involved in a lawsuit and a judgment is entered against him, it could become a lien against the Florida property.  And in the event of a divorce, the child’s spouse may obtain an interest in the property.

Another issue is incapacity.  If one of the owners of the property becomes incapacitated, the property cannot be sold or mortgaged without a costly, emotionally painful and time consuming guardianship proceeding.

Finally, the foreign property owner must deal with U.S. Federal Estate Tax.  Upon the death of a foreign owner of Florida property, that owner’s estate (or the portion located in the United States) would be subject to Estate Tax beginning at 35%.

For Canadians, this means if the deceased Canadian owns more than $60,000 of U.S. assets, his estate would be subject to U.S. estate tax.  U.S. citizens get a $5 million exemption meaning they do not pay any estate tax on the first $5 million of their estate.  Foreign property owners get a pro-rated exemption based on the value of their worldwide assets.  A Canadian dying with worldwide assets of $2 million who owns a home in Florida worth $200,000 would receive an estate tax exemption of $500,000 under the current estate tax law ($200,000 is 10% of $2 million so the Canadian would get 10% of the $5 million exemption granted a U.S. citizen).

For U. K. citizens, transfers to a non-U.S. citizen, even a spouse, will result in estate tax unless advance planning is done.  U.S. citizens can pass an unlimited amount to a spouse at death – called the marital deduction.  Transfers to non-U.S. citizen spouses are subject to Estate Tax unless the transfer is made to a Qualified Domestic Trust, a special trust that requires that the property or its proceeds always remains within the jurisdiction of the IRS.

Corporations are one way to avoid the negative effects of the issues above.  However, a corporation is subject to a capital gains rate of 40.5% as opposed to 15% for individuals and most trusts.

All of the issues mentioned above, probate, incapacity, estate taxes and capital gains taxes, can be successfully addressed by a revocable trust.  Because of the unique issues involved, this revocable trust will be different from one prepared for a U.S. citizen.

Book Trailer Video

The new video for The Official Snowbird's Guide To Becoming A Florida Resident has been released.

Click on the link below to watch it and please use the comments to let us know what you think.

Taking Full Advantage of the Lack of State Income Tax in Florida

As I'm sure you've read on this site before:  Florida has no state income tax.  The State Constitution prohibits it.  That's a big reason many snowbirds relocate to Florida.

However, becoming a Florida resident may not completely relieve you from payment of state income tax.  The state you left may not be as accommodating to your desire to live a tax-free life.  It may still subject you to income tax there if you continue to have certain connections to that state.

For example, New York is a poor loser when it comes to your taxes.  If you move to Florida and become a resident but still earn income generated from property situated in New York or from a business located in New York, you will still be subject to New York state income tax as a non-resident for that income.

If you remember from The Official Snowbird's Guide To Becoming A Florida Resident, Florida residency from Florida's point of view is determined by your intention.  If you come to Florida with the intention of making it your primary residence, then you are a Florida resident and entitled to the benefits that go along with it.  Of course you must provide clear evidence of that intention, such as obtaining a Florida driver's license, registering to vote in Florida, etc.

However, the state you departed may not look at it that way.  It usually has different criteria to determine whether or not you are no longer subject to its taxes.  This is often confusing to new Florida residents.  Even though you are considered a Florida resident by the State of Florida and entitled to the homestead exemption and other benefits, your prior state may also consider you a resident for the purpose of taxation.  New York will consider you a "statutory resident" for income tax purposes if you spend more than 183 days in New York and have a residence (even secondary residence) there.

A few of the tax-happy states of the Northeast have created the North Eastern States Tax Officials Association Cooperative Agreement on Determination of Domicile.  The name of the agreement alone makes you want to get out and move to Florida.  Under this agreement, the participating states will apply the same criteria to determine what your domicile is for tax purposes.  The factors they use are:

1. How you use your Northeastern home as compared to your Florida home.  Which one appears to be your primary residence?
2. Are you involved in a business (employment, participation in management, compensation, and ownership) in the Northeastern state?
3. In which state do you spend most of your time?
4. Where do you keep your valuables - items that you hold "near and dear" to your heart?
5. Family connections.

If the state auditor cannot determine your residency for tax purposes from the criteria above, he or she will look to other factors such as: What address do your bank statements and bills get sent to? Where are your vehicles and boats registered?  Where do you have safe deposit boxes? Where are you registered to vote?  What does your will or other legal documents say is your residence?  Some states will even analyze your phone services to see which looks more like your primary residence.

OK former New York residents, what have we learned?   If you want to escape state income tax in New York,  1) Don't spend more than 183 days in New York in a calendar year, 2) move all of your assets and connections to Florida, if possible, and 3) sever all ties to businesses and property in New York that will generate New York income.

Homestead Filing Reminder

If you are a new Florida resident, one of the most valuable advantages you have acquired is the ability to claim the homestead exemption.  If you have not applied for the homestead exemption yet, I am making this post to remind you that you have until March 1 to apply for this year.  If you applied in previous years, the renewal of the exemption is automatic.

Initial applications for the homestead exemption must be made within January 1 and March 1 at the Property Appraiser's Office in the county where the property is located.  Many counties allow you to file by mail.  You should visit your county's Property Appraiser website to print out forms and to get further instructions.  Please remember that you can qualify for the homestead exemption only if you were a Florida resident residing in the property as your primary residence on January 1 of this year.

For more information regarding the advantages of the homestead exemption, read my earlier posts, here and here.

Weather or Not

Reason No. 263 --  Why I love living in Florida: 

This is my view on my ride into work this morning.

Per Weather.com -

New York City - 32 degrees, Light Snow.

Chicago - Cloudy, 17 degrees, feels like 8 degrees.

Detroit - 19 degrees, Light Snow