Florida – best known for its warm weather – is also a state that does not levy a state-level income tax. The absence of a state income tax is appealing for individuals and businesses, but something that individuals may forget is that this also applies to trusts. Florida is one of seven states that does not impose fiduciary (trust) income tax. The remaining states impose tax at rates as high as 13.3%.
Many individuals will create or serve as trustee of a trust outside of Florida and then subsequently move to Florida. Swimsuits and sunscreen are almost always packed for the move. Trusts, however, are often left behind.
When a trust is created, it will usually be governed by the law of the state in which the grantor was domiciled at trust creation. This will be the trust’s “home,” or situs. If the grantor later moves to Florida, and does not make any changes to their trust, the trust will face state level fiduciary (trust) tax on income in the original state, even if trust administration is taking place in Florida.
A majority of states allow the trustee of a trust to transfer the trust situs to Florida. The ability to do so often requires that the trustee reside in Florida and that all or most of the trust administration take place in Florida. Depending on the laws of the original situs and terms of the trust agreement, transferring trust situs can be done through (i) decanting, (ii) trust modification, (iii) nonjudicial settlement agreement, (iv) merger, or (v) separation. States often have additional requirements that must be met prior to transfer, such as notice to trust beneficiaries. Coordination with accountants and other financial professionals is required to plan for and avoid negative income tax implications.
In 2010, John, a Pennsylvania resident, created a trust for the benefit of his daughter, Jane. John’s brother, Joe, was appointed Trustee. The trust is governed by Pennsylvania law, and has a Pennsylvania situs. The trust contains marketable securities. Joe moved from Pennsylvania to Lakewood Ranch, Florida in 2019. Joe handles trust administration poolside in Lakewood Ranch. The trust, as a Pennsylvania trust, is taxed at a 3.07% income tax rate. The trust, if moved to Florida, would face zero state level income tax.
Can the trustee move the trust situs to Florida? Yes. Joe is required under Pennsylvania law to provide notice to the trust beneficiaries of the proposed transfer. If Jane does not object, Joe and Jane will execute a nonjudicial settlement agreement whereby the legal basis for trust transfer is set forth and the situs is transferred. The trust is now a Florida trust. Joe will coordinate with the trust’s CPA to make sure all income tax filing requirements are met.
The transfer of a trust situs requires detailed legal and tax analysis, but the move can result in considerable income tax savings. Individuals who have moved or plan to move to Florida should consider this estate planning tool.
Leech Tishman’s Estates & Trusts Practice Group is engaged in the development of practical, effective estate planning and business succession planning for individuals, families, businesses, non-profit organizations, and private foundations.
If you have any questions regarding transferring trust situs or any other estate & gift tax matters, please contact the firm’s Estates & Trusts Practice Group.
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Leech Tishman Fuscaldo & Lampl is a full-service law firm dedicated to assisting individuals, businesses, and institutions. Leech Tishman offers legal services in alternative dispute resolution, aviation & aerospace, bankruptcy & creditors’ rights, construction, corporate, employee benefits, employment, energy, environmental, estates & trusts, family law, government relations, immigration, insurance coverage & corporate risk mitigation, intellectual property, internal investigations, international legal matters, litigation, real estate, and taxation. Headquartered in Pittsburgh, PA, Leech Tishman also has offices in Chicago, Lakewood Ranch, FL, Los Angeles, New York and Wilmington, DE.