2023 INFLATION INCREASES
Recent inflation has brought with it changes in various automatic adjustments in certain government benefits and tax attributes. For example, the cost-of-living adjustment (“COLA”) will increase Social Security and Supplemental Security Income payments for over 70 million Americans by 8.7% in 2023. In addition, the IRS has announced other inflation-driven increases. Two of the most watched from an estate planning perspective are that the annual exclusion for gifts will increase from $16,000 to $17,000 per done, and the lifetime exemption from gift and estate taxes will increase from $12.06 million to $12.92 million per taxpayer. The generation-skipping transfer tax exemption, which is tied to the gift and estate tax exemption amount, will increase the same as the lifetime exemption.
RENEWED POTENTIAL FOR 2022 FEDERAL TAX LEGISLATION AFTER THE FALL ELECTIONS
While predicting election results is not the normal province of estate planners, it is important to pay attention to potential election results that might result in changes in applicable laws. That is the case this year. As we have reported previously, proposed income, gift, estate, and generation-skipping transfer (“GST”) changes have not been adopted so far in 2022. Nonetheless, the potential exists that if the Democrats lose control of one or both houses of Congress in the upcoming elections, they might attempt to pass such legislation between the election and January 3, 2023, when the new Congress convenes. Accordingly, taxpayers who could be affected by such changes should discuss those prospects with their tax advisors and consider adopting effective tax avoidance techniques that such legislation might eliminate or substantially curtail. In addition, as we keep repeating, taxpayers need to remember that the clock continues to run down on the income, gift, estate, and GST tax features of the 2017 Tax Act, because in 2026 they are due to expire and revert back to previous tax law. Critical among those expiring features is that the then-current inflation-adjusted lifetime gift, estate, and GST tax exemptions (again, $12.06 million for 2022; $12.92 million for 2023) will be halved in 2026.
THE FLORIDA HOMESTEAD EXEMPTION AND THE RISING REAL PROPERTY TAX COSTS OF NOT HAVING IT IN INFLATIONARY TIMES
Florida law provides a $50,000 homestead valuation exemption from real property taxes for personally-used principal residences of Florida domiciliaries. More importantly, qualifying a residence for the homestead exemption also qualifies it for the Save Our Homes Cap (“SOH Cap”), which limits the year-to-year valuation increase a county property appraiser can assess to the lesser of three percent (3%) or the annual change in the Consumer Price Index or “CPI”.
While inflation has been below three percent (3%) for many years until recently, homesteaders have enjoyed the SOH Cap’s “lesser of” feature. Nonetheless, recent and continuing high inflation, coupled with substantial market value increases in Florida residential real estate (although the rate of increases seems to be tapering off of late) means that property appraisers’ valuations as of the upcoming tax day, January 1, 2023, will result in substantial valuation and consequent real property tax increases for non-homestead residences.
Taxpayers who have Florida principal residences eligible for the Florida homestead exemption, but who have not yet obtained it by filing a homestead application with their county’s property appraiser, should do so promptly. Although the application deadline is not until March 1, 2023, for homestead status to relate back to the January 1, 2023 tax day, failure to file timely will have expensive short and long term consequences. The latter is because the lack of the companion SOH Cap for non-homestead property will continue to impact the property’s valuation and thus its tax bill each year.
Homestead qualification also can provide substantial benefits in a recession because market downturns in the homestead’s value that exist on a tax day reset downward the base from which the SOH Cap will apply in the future. Indeed, many Floridians who bought their homesteads before or during the market downturn caused by the 2008 recession are continuing to enjoy much lower than market valuations for their homesteads, and hence real property taxes, due to the SOH Cap and interim low inflation until recently.
PLANNING WITH FLORIDA COMMUNITY PROPERTY TRUSTS AND COMMUNITY PROPERTY FROM OTHER STATES
As previously reported in this Gunster alert, in 2021 Florida adopted the Florida Community Property Trust Act (the “Act”) that enables spouses to create a Florida trust to convert their separate property into Florida community property to take advantage of the income tax benefits afforded to community property at death. Nonetheless, spouses considering setting up a Florida Community Property Trust (a “FLCPT”) need to consider the risks and rewards of FLCPT in relation to their own circumstances.
A FLCPT is a trust created jointly by spouses and funded with their separate property that converts such property to community property. The FLCPT may be revocable or irrevocable. If the trust is revocable, either spouse may revoke the entire trust without the consent of the other spouse at any time. Upon the death of the first spouse, a revocable FLCPT will terminate and the trust’s property will be divided into equal shares and distributed between the surviving spouse and the deceased spouse’s estate. Upon dissolution of marriage, the revocable FLCPT will terminate and the trust’s property will be divided into equal shares between the spouses.
A FLCPT is an “opt in” trust that should not be confused with a joint trust holding pre-existing community property from a community property state. Pre-existing community property from such a state likely has additional or different property rights than community property established under the Act. Thus, for spouses who move to Florida from a community property state, it may not be necessary to terminate a joint revocable trust with pre-existing community property to utilize a FLCPT instead.
A FLCPT provides a substantial income tax planning opportunity for highly appreciated low basis property and a Florida homestead residence that may be sold after the first spouse dies. The main advantage of the FLCPT is that all of the property held in the trust will receive a full basis adjustment to fair market value (generally, a “step up”) upon the first spouse’s death, allowing the surviving spouse and beneficiaries to sell such property after the first spouse’s dies with little to no capital gains tax being imposed.
Nonetheless, this substantial income tax benefit comes with the cost of lost creditor protection on property that otherwise would have been protected if the property instead were held as tenants by the entireties (except for a Florida homestead residence, which has separate Florida constitutional asset protection). Since all property in the FLCPT is treated as community property, a creditor of only one of the spouses would be able to satisfy its claim from both spouses’ shares of the trust property. If the property were not held in a FLCPT and instead were titled as tenants by the entireties, the creditor of only one spouse would not be able to get the property.
Another FLCPT risk is that the IRS may argue that a “double basis step up” (i.e., for both spouses’ shares) is not available for property under an “opt in” community property law like the Act. While the prospect of the IRS not recognizing the FLCPT for purposes of the double basis step up is a concern, it should be mentioned that there is substantial authority to suggest that the IRS should and will respect Florida’s “opt in” Act.
One obvious planning opportunity with a FLCPT is for the spouses’ Florida homestead. The Act specifically preserves Florida homestead asset protection treatment for any homestead transferred to a FLCPT. As stated above, the creditor protection risks associated with community property are substantially reduced by the preservation of homestead asset protection while also allowing spouses to receive a double basis step up. Accordingly, even spouses in high liability exposure professions may want to consider placing their homestead into a FLCPT to receive the double step up in basis with no greater liability risk.
Utilizing a FLCPT to hold a homestead also may be beneficial for spouses with previously created joint trusts containing community property from another state. In that scenario, any Florida residence purchased by the spouses that qualifies as homestead is conclusive evidence that such property is not community property and, therefore, the homestead would not qualify for the double step up in basis if it were held outside a FLCPT. Under such circumstances, the spouses may consider funding a FLCPT with their homestead as its only asset to have the residence qualify for the double step up in basis while still maintaining homestead asset protection.
NEW FINCEN RULE REQUIRES FAMILY-OWNED BUSINESS ENTITIES (AND OTHERS) TO REGISTER BENEFICIAL OWNERSHIP
The federal Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of the Treasury recently released a final rule requiring most business entities, such as corporations, limited liability companies, and other entities created in or registered to do business in the U.S. to report their “beneficial ownership information” (“BOI”). Although the rule is intended to protect U.S. national security and strengthen the integrity and transparency of the U.S. financial system to stop criminal actors from using anonymous shell companies to conceal their illicit activities, the rule also requires legitimately operated family-owned businesses to report their BOI as well. New business entities created on or after January 1, 2024 will have 30 days to file their initial report. Business entities created or registered before then will have until January 1, 2025 to file their initial reports. Currently, trusts are generally excluded from reporting, but do not be surprised if FinCEN expands its rule in the future to require them to report beneficial ownership too.
AT LAST! DELAWARE LAW PROVIDES EXCULPATION PROTECTION TO CORPORATE OFFICERS
Delaware’s General Corporation Law recently was amended to allow Delaware corporations to provide exculpation for breaches of fiduciary duty to certain officers in certain circumstances, on top of pre-existing law’s allowance for such exculpation for directors. For more on this important Delaware law change, see this Gunster alert.
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This publication is for general information only. It is not legal advice, and legal counsel should be contacted before any action is taken that might be influenced by this publication.
About Gunster
Gunster, Florida’s law firm for business, provides full-service legal counsel to leading organizations and individuals from its 12 offices statewide. Established in 1925, the firm has expanded, diversified and evolved, but always with a singular focus: Florida and its clients’ stake in it. A magnet for business-savvy attorneys who embrace collaboration for the greatest advantage of clients, Gunster’s growth has not been at the expense of personalized service but because of it. The firm serves clients from its offices in Boca Raton, Fort Lauderdale, Jacksonville, Miami, Orlando, Palm Beach, Stuart, Tallahassee, Tampa, Vero Beach, and its headquarters in West Palm Beach. With more than 240 attorneys and consultants, and over 240 committed support staff, Gunster is ranked among the National Law Journal’s list of the 500 largest law firms and has been recognized as one of the Top 100 Diverse Law Firms by Law360. More information about its practice areas, offices and insider’s view newsletters is available at www.gunster.com.
