Estate Issues for Foreign Citizens Owning Property in Florida

Thursday, October 20, 2011 at 05:53PM

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.