Florida is one of only seven states with no state income tax. When combined with the warm climate, the friendly tax policy that allows for NO income taxes AND NO Florida estate and inheritance taxes makes Florida an immensely popular retirement destination.
After all, if you’re a retiree on a fixed income, the tax savings on IRA distributions, Social Security benefits, and pension payments helps your budget go a little further.
But, of course, as any Floridian can tell you, this doesn’t mean you don’t have to pay any income taxes. You just don’t pay state income taxes. The IRS still wants its money.
ESTATE AND INHERITANCE TAXES IN FLORIDA
Estate and inheritance taxes in Florida work essentially the same way. The state government doesn’t charge any “federal death tax,” but qualifying Florida estates are still responsible for estate taxes owed to the federal government.
And Florida residents who inherit property from out-of-state may still have to pay inheritance taxes to the other state.
Defining Estate and Inheritance Taxes
Death taxes, including estate and inheritance taxes, are taxes imposed by a governing authority on the assets of a recently deceased person.
The terms “estate tax” and “inheritance tax” are often used interchangeably – and they are similar – but there’s a subtle distinction between the two.
Where an estate tax is owed by the estate itself, inheritance taxes are levied against the individual portions received by heirs.
Estate taxes are paid by the estate executor, or Florida personal representative, often using assets in the estate in Florida or elsewhere; inheritance taxes are owed by individual heirs, though it is not uncommon for Florida last wills to provide for payment of inheritance taxes from estate assets.
Either way, the State of Florida does not impose any taxes on estates or inheritances, but other jurisdictions do.
Prohibited Under the Constitution
Florida isn’t unique in this regard – only fourteen states have an estate tax, and four more have an inheritance tax (New Jersey and Maryland have both). But Florida does stand out in that estate taxes are expressly prohibited by the state constitution.
So, for Florida to implement an estate tax would require a full-blown constitutional amendment and not just new legislation. This constitutional guaranty makes Florida’s tax laws particularly advantageous for anyone concerned about minimizing estate taxes.
Florida Residency Advantages
If Florida is your primary state of residence, your future estate will be administered in Florida under Florida law, and it therefore won’t be subject to any inheritance taxes or state-level estate tax, regardless of where your heirs live.
However, if you are a Florida resident and you inherit property from someone in a state that taxes inheritances, like for instance Pennsylvania, you may owe an inheritance tax to the other state.
The amount of the tax and whether it is owed at all depends on the value of the inheritance, the taxing state’s rates and exemption scheme, and your familial relation to the deceased. Closer relations are typically allowed greater inheritance tax exemptions.
Distinguishing Inheritance Taxes vs. Income Taxes
It’s important to remember that inheritance taxes are completely distinct from income taxes, and inherited property is not taxable income due to the step up in basis.
So, if you receive a large cash inheritance, you don’t have to include it as taxable income on your income tax return, even if you have to pay an inheritance tax.
However, if you receive income derived from an inherited asset that would have been taxable to the decedent, then you are responsible for the income tax.
For instance, if you withdraw money from an inherited IRA, and the distribution would have been taxable to the decedent, the funds you receive are taxable income.
Or, if you sell inherited real estate for more than the deceased paid for it, you will likely have to pay either income or capital gains tax on the profit, depending on how long the property was held.
Federal Estate Tax
As mentioned above, the State of Florida doesn’t have a death tax, but qualifying Florida estates are still responsible for the federal estate tax (there is no federal inheritance tax).
To the extent its assets exceed the $11.18 million exemption (as of 2018), an estate is taxed at a marginal rate of up to 40%. This means that, for an estate valued at $12 million, the $820,000 overage is subject to the tax, which is implemented in progressively increasing brackets like the federal income tax.
Because transfers to spouses are exempt, married couples can effectively double the exemption to $22.36 million through the use of estate-planning strategies like pass-through trusts for spouses.
Calculating Taxable Estates
To calculate an estate’s taxable value, you simply subtract liabilities from assets, with “assets” defined broadly to include substantially more than what goes through probate.
Real estate, financial accounts, business interests, assets held in a trust controlled by the decedent, and death benefits from life insurance policies are all included within a taxable estate.
However, if a life insurance policy is held in an Irrevocable Life Insurance Trust (ILIT) for at least three years prior to death, the benefits can be kept out of the estate.
How Federal Estate Taxes Are Paid?
The federal tax is owed by the estate itself and must be paid by the executor in cash. This can cause problems for valuable estates with predominately illiquid assets like land.
In some cases, executors are forced to liquidate assets to pay the taxes.
A popular strategy for avoiding this dilemma is to take out a life insurance policy for estate planning, or more specifically where the death benefit is earmarked for payment of estate taxes and administrative fees.
Gifting Strategies and Irrevocable Trusts
To an extent, estate tax liability can be mitigated by removing assets from the future estate prior to death. This can be accomplished through certain forms of irrevocable trusts, or, more simply, by giving assets to heirs or charities during life.
Selling off assets is generally not an effective strategy for reducing estate tax liability because the value is just transferred from one form to another.
Annual Gifts
The tax code allows annual gifts of up to $15,000 per recipient (doubled for married couples) without any gift tax liability.
So, if you give assets worth $15,000 to each of your three kids, you will have reduced your eventual estate by $45,000 without incurring any gift tax for yourself or your children.
Repeat the gifts over a few years, and future estate tax liability can be dramatically reduced or even eliminated.
Appreciating Assets
The gifting strategy is particularly effective with appreciating assets because the recipient acquires the giver’s tax basis along with the gifted asset.
When the recipient eventually transfers the asset, he or she will owe capital gains tax on the appreciation at a maximum rate of 20.00%.
On the other hand, if the asset remains in the estate (and the estate qualifies for the tax), it will be subject to the estate tax at a maximum rate of 40.00% of the asset’s present value, with no reduction for the cost basis.
Form 709
Gifts of over $15,000 to one recipient within a single year require a Form 709 gift tax return.
There won’t necessarily be any gift tax due at the time, but the value of the gift over $15,000 is deducted from the giver’s $11.18 million lifetime limit, which is tied to the estate tax exemption.
For instance, if you give away an asset worth $205,000 ($180,000 over the yearly maximum), your eventual estate tax exemption will be reduced from $11.18 million to $11 million.
The lifetime gift exemption is just that – a lifetime maximum. Once you use it up, you can’t get it back, so it’s a good idea to gift strategically.
Gifts Between Spouses
Gifts from one spouse to the other and gifts for educational or medical expenses (as long as paid directly to the provider and not to the person receiving the benefit) are not subject to the gift tax.
Hence, if you give your grandson $50,000 to pay for college, your exemption will be reduced by $35,000 – the amount of the gift minus the $15,000 allowed annually. But, if you pay the school directly, your exemption won’t be affected.
Retirees
Due to its estate, inheritance, and income tax policies, Florida is generally considered a tax-friendly state for retirees.
And although Florida’s laws can’t protect residents from federal estate taxes or inheritance taxes imposed by other states, a strategic approach developed with the help of an experienced Florida estate-planning attorney can go a long way toward reducing tax liability and ensuring that you transfer more of your estate to your loved ones and less to the IRS.
If you’d like to learn more about estate tax savings strategies or any aspect of estate planning in Florida, connect with us today!
Steve Gibbs, Esq.
Hi Steve,
I have been reading your blogs and I am so very proud of you. You are doing a great job with this and I sure do hope that it has improved your business. I am the redhead you met several years ago who was an analyst in management. Please send me some business cards because I am now a lay minister working with some elderly people.
Drop me a note and let me know how your life is? Did you ever remarry?
Until then, my very best,
Pam
Hi Pam, it’s great to hear from you, yes all good here and did re-marry:). Hope all is well for you also and will send out some cards.
Best, to you.
Steve
Great article!
My question would be, what if a non-us citizen who owned property dies in his home country. Will the same laws apply for his heirs? Will they have to pay estate taxes for the property?
Thanks for your interest and comment Jean. The short answer is yes the same laws apply with even less spousal advantages for non-U.S. citizens. That said, the estate taxes will depend in part on size of the estate and laws applied in home country. Ideally, you should seek legal advice from someone in your home country who also has experience with U.S. laws to get a clear picture of your estate tax exposure. I hope this helps.
Best, Steve Gibbs, Esq.
Thanks for the advice, great article!
I’m a legal resident of Florida, with property there since 1905. My Mom, a resident of R.I. She has passed away, and had a legal drawn up will. On the will, I was left the stock she owned. I turned it over to TD Ameritrade. I asked if I would be taxed on it, and they said no. I really know nothing about stocks, and that is why I had them handle it. Now the IRS is after me for taxes I thought I didn’t have to pay. Can you help me?
Hello Richard, it is tough to know what the IRS or address potential tax concerns without carefully reviewing everything. That said, there should have been a step up in basis to eliminate capital gains taxes. Please only consider this general information because more would need to be discussed to offer actual guidance.
Best,
Steve Gibbs, Esq.
Hi Steve,
Great article and very helpful. I am and my mother was a FT resident in FL. I am her executor. Her only asset was her mobile home, which was not really an asset as it is being sold for 20k less than purchase price 2 years ago. After all is said and done the approximate distribution to each child will be about 34k. I do not understand if I have to pay a federal tax as the executor prior to distribution or if each child pays taxes or if there are any taxes owed on an estate with a capital loss. Thank you for educating those that are overwhelmed by this process during difficult times.
Hello Jennifer,
Rather than dive into your question which is a bit complicated for a blog post response, I should point out that if that asset was in your mother’s name, it may need to be probated to transfer it and if so, your question would be better addressed by your probate attorney. However, that said, a federal estate tax wouldn’t be due for a small estate and typically the adult child wouldn’t pay income taxes on inherited real property (or basis). That’s really as far as I can go as it appears that you need some more professional advice. Feel free to reach out to Gene at admin@gibbslawfl.com.
Best to you.
Steve Gibbs, Esq.
Hello, My Grandmother recently made a decision to move into a home for elders. She deeded 1/2 of her only (& primary) Florida residence to my mother, and retained the other 1/2 in deed.
We are now concerned about how to proceed without affecting her benefits (i.e. Soc. Sec., elderly care facility costs, tax implications, medical, etc.).
The home isn’t worth more than $100k, and she has very little liquid cash. Could she benefit from your services so that her financial situation is preserved or improved? – she is trying to avoid a negative impact on an already strained delicate budget.
–in need of seriously good advice for my Grandmother.
Hello Christi, it does appear that your grandmother may benefit from professional help. For example, the deed transfer perhaps should have been done with a lady bird deed for a number of reasons: https://www.gibbslawfl.com/lady-bird-deed-in-florida/.
The next step would be to schedule a confidential discussion with Gene at admin@gibbslawfl.com.
Best,
Steve Gibbs, Esq.
My sister and I inherited a property in Fla from step dad. Was in a living trust for a year. He died in Jan. We live in different states. We will need to sell the property . What will be have to pay ?
Hi Jessica, thanks for commenting. Generally, when a person inherits real property, they get what is called a step up in basis, so an estate tax wouldn’t be owed on unless the overall estate exceeds the exemption amount which is currently just about $11.5 million. Income taxes are different concern if there is income coming from the estate. I can’t really comment beyond that without learning more from a conversation, but those are the general guidelines. Let us know if we can help further.
Best,
Steve Gibbs, Esq.
My mom passed away earlier this year and she owes the IRS over $1oK but doesn’t have the money. As the executor how am I suppose to pay that back?? Thanks in advance.
Hello Eric, thanks for commenting. This is a question that you need to direct to your probate attorney. If you don’t have one and there are literally no assets it may not be a concern; however, the IRS has broad powers to attach liens to any existing assets. This is just a quick observation – you most likely would benefit from professional advice on this from an experienced estate planning attorney and/or CPA.
Let us know if you need additional guidance.
Best, Steve Gibbs, Esq.
Hi Steve,
I was just reading your article and think its very good info. My question is, I live and work in California and will be inheriting money and property from my parents that right now is in a trust. I will be moving to Florida after that. But if I was to establish residency in Florida somehow beforehand but still be living in California, can I avoid the inheritance tax from Calif. by saying Im a Florida resident.
Thanks for your input .
Hello Jeff and thanks for commenting. The short answer is I think it’s a good idea to relocate your residence to FL beforehand if possible to escape CA income tax on inherited assets. That said, there is no CA state inheritance tax at the present in 2020. The federal limit is approximately $11.5 million (for a single person and double for married persons) so your exposure would depend on whether the inherited trust assets (possibly combined with non-trust assets) exceed this amount.
If your parents are still able, it would be advantageous to have them include “dynasty protection” in the trust for your benefit is this would provide a great asset protection option for you in these interesting times.
Let us know if we can help further by connecting at info@gibbslawfl.com.
Best, Steve
Hi. Thank you for this valuable and informed blog.
I am living with my mother after my father’s recent death.
She is going to buy a home in Florida next year. I will continue to live with her and caretake.
What would be the best way to transfer the ownership of the house to me, in order to avoid medicaid reaching in and capital gains taxes at the time of her death. Assume she will live at least 5 years and we will both be full time residents, and it is possible for me to be included on the deed since the home is not yet purchased…
Hello Scott, thanks for your helpful question. Your best options would either by an enhanced life estate (lady bird) deed or a revocable trust depending upon a number of factors that should be carefully considered with your mother. First step is a consultation and to get started, connect with Gene at info@gibbslawfl.com.
Best, Steve Gibbs, Esq.
I own property in Fla which I am considering renting. If I move to another state and rent my Fla property can I still maintain my Florida resident status?
Hi Alvin, in theory you can still maintain FL residency but the rule is you’re residing in the state of FL at least 6 months and 1 day throughout the year. I would be careful about this as other states will want to deem you a resident if you’re living and working there and you may be subject to taxes anyway. Just educational information as I would need to know more about your situation in a consultation setting in order to properly offer advice.
Best, Steve Gibbs, Esq,
My 96-year old mother (FL resident) passed away last month. She did not own a home or motor vehicle; she only had financial accounts (checking, savings, IRA , Annuity). She had a Will prepared about 15 years ago naming myself and brother (50%) and step-children (50%). However, all her accounts were held in her name jointly with either me, my brother, or one of the step-daughters. My questions: (1) does the Will need to be probated? and (2) are all financial assets to be divided as set forth above, or does the joint owner on each account receive the money in that account?
Hello, I can’t comment on whether a probate is required as we can only offer educational feedback on the blog. However, in general of all accounts are jointly titled or have right of survivorship, a FL probate may not be required.
Best, Steve Gibbs, Esq.
Father passed away this year i did not know i was on the deed of his condo since 2018. i sold the condo asap could not keep 2 house payments. when he passed he owed 45 on condo i sold it for 140. just try find out what i may owe on capital gain. i live in fl
Hi Cody, I suggest you connect with a CPA on your capital gain exposure.
Best, Steve Gibbs, Esq.
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