Category Archives: Taxes

Attention Snowbirds!!

Many states are beginning to aggressively challenge the domicile of individuals who claim to no longer live in a state that they have ties too, such as a home or business. Challenges to your domicile status by your former state can eat up time, money and cause emotional destress.

The main reason a state would challenge your domicile status is of course, money. Your former state would like to continue claiming you as a resident and tax you on all of your income; in states suffering from a large deficit this is ever more prevalent.

Domicile disputes can happen to anyone, from a retired couple in their 60s who passed down a family business to their children to former Yankee, Derek Jeter. In both situations the  former New Yorkers were forced to pay back taxes on all of their income to the state of New York because they did not properly declare domicile in Florida.

If they had properly declared Florida domicile they could only have been taxed for income sourced in their previous state.

With The Florida Domicile Handbook you can learn how to properly declare domicile and avoid a potentially costly legal battle and the headache that comes along with having your resident status challenged by your former state.

Benefits of Moving to Florida From a high-tax State

I recently stumbled across an article that articulates the basic thesis of The Florida Domicile Handbook; and this article touches base on many of the things that are explained in-depth in The Florida Domicile Handbook.

Some of these advantages include:
• No Income tax
• An Array of Asset Protection
• Healthy Real Estate Market
• Homestead Exemption
• No State Estate Tax

One of the key takeaways from this article and the book is that the process of declaring domicile in Florida can make your life more enjoyable all across the board. The weather provides year-round access to the outdoors and endless opportunity for recreation, the vibrant wildlife and beautiful scenery can be found no where else in the world and the tax codes help keep a little more money in your pocket. Click here to read the article, and pick up your copy of The Florida Domicile Handbook for a step by step guide of your move to paradise.


Advantages of an Intentionally Defective Grantor Irrevocable Trust

Joseph and Ann Sullivan had been to an attorney who recommended that they use a grantor retained annuity trust to reduce their estate in order to pass a valuable piece of income-producing commercial real estate to their daughter, Becka. They were hesitant about the attorney’s plan because, if they died during the term of the trust, the trust would terminate. The property would be back in their estates and they would not accomplish their goal. In addition, they would not be able to include generation-skipping provisions in the trust with a grantor retained annuity trust, so the property would be subject to another layer of tax in Becka’s estate.

The grantor retained annuity trust would not address their concerns. A better solution was available through the use of an intentionally defective grantor irrevocable trust. Not only would this trust allow them to transfer any future appreciation to their daughter (effectively freezing the value of the real estate in their estate), but also the plan would take effect immediately. As a result, they would have a way to substantially leverage their generation-skipping exemption and the trust would provide an opportunity for additional significant planning benefits.

One of the primary goals of any good estate plan is to reduce your exposure to taxes while leveraging your gift, estate and generation-skipping tax exemptions.

Grantor retained annuity trusts (GRATs) hold assets and pay income to you as the grantor for a specified term. At the end of the term, the assets pass to your children or selected beneficiaries. Because you retain a right to income from the GRAT, as long as the assets’ growth exceeds the income payment, you are able to leverage your giving ability by discounting the value of the gift assets—thereby reducing any taxes due on the gift.

Another type of grantor trust that provides an opportunity for leveraging and receiving tax benefits, while keeping the trust property out of your estate, is the intentionally defective grantor irrevocable trust (IDGIT).

As part of the Internal Revenue Code since 1954, grantor trust rules stipulate that, if a trust document contains certain provisions, the trust’s income will be taxed to the trust’s creator—the grantor—rather than to the trust itself. Congress devised the rules thinking no sensible taxpayer would want to pay a trust’s tax bill, especially because individual tax rates at that time were higher than trust tax rates and the grantor cannot be a beneficiary of a grantor trust. But now, income tax rates are much lower than they were in 1954 and, thus, for someone focused more on estate taxes, a grantor trust, an IDGIT, can substantially increase the wealth passed to heirs.

IDGIT Basics

An IDGIT is simply a type of irrevocable trust drafted to trigger the grantor trust rules and force the grantor, rather than the trust, to pay income tax on trust income. That’s the “intentionally defective” part. Assets are moved into and become owned by the trust. The positive result is that those assets, and their future appreciation, are outside the grantor’s taxable estate. Paying the income tax on the trust’s annual earnings further reduces the grantor’s estate while netting another benefit: 100 percent of the earnings can accumulate inside the IDGIT, to the advantage of the trust beneficiaries, who are typically the grantor’s children.

Because the IRS requires that the grantor pay the trust’s tax, that payment is a legal obligation, not a gift, so no gift tax applies. In effect, value is shifted to the trust beneficiaries at the grantor’s income tax rate. This is preferable to having the IDGIT or its beneficiaries pay the income tax while leaving value in the grantor’s estate that would later be subject to estate tax.

Drafting the trust to be defective (so that it triggers the grantor trust rules) is a simple matter for a knowledgeable attorney. One way to do this is to provide that trust principal or income may be distributed to the grantor’s spouse. This arrangement has no estate or gift tax significance, but it automatically makes the trust a grantor trust.

Another way to accomplish this is to specify that the grantor retains the power to reacquire the trust corpus by substituting other property of equivalent value or by giving someone other than the grantor or current beneficiary of the trust the power to expand the class of beneficiaries. Such power is sometimes given to the grantor’s accountant or attorney and, even though the power may never be exercised, the grantor trust rules are triggered.

A good attorney will also provide an element of control by making it possible to “turn off” the grantor trust status, in case paying tax for the IDGIT becomes a financial burden for the grantor. This can sometimes be accomplished by giving a power holder (such as the accountant or attorney in the previous example), the right to renounce the power.

Selling Assets to an IDGIT

A grantor can transfer assets into an IDGIT by either gift or sale. Making a gift consumes the grantor’s various exemptions, but, if the grantor sells an asset to the IDGIT, there is no gift and therefore no gift tax. Furthermore, there is no recognition of gain and, thus, no capital gains tax when assets are sold to an IDGIT. For tax purposes, selling an asset to an IDGIT is the same as selling an asset to oneself: no tax.

If you have highly appreciated assets you would like to remove from your estate, you could possibly avoid all capital gains taxes as well as gift taxes by selling the assets to an IDGIT that you create. To leverage the transaction, the IDGIT could pay for the assets in the form of an installment note, payable over several years. The Internal Revenue Code allows you to charge a relatively low rate of interest on the installment note. This is a decided advantage, as it enables an IDGIT that is earning a market rate of return to invest the cash flow in excess of the low-interest note payments so that it can accumulate and grow and eventually be used to pay back the note principal. Also, because of the grantor trust rules, you do not have to recognize the interest on the note. So, there is no tax deduction for the trust and there is no taxable income for you, the grantor, for interest payments on the note from the trust. However, you are still liable for taxes on the income earned by the IDGIT, including any income earned by property sold to the trust.

The excess income over the note payments may be high enough to allow you to further leverage the value of the IDGIT through the purchase of insurance or some other growth vehicle. In addition, because the grantor pays the income taxes on trust income, the trust’s return is enhanced for the beneficiaries of the trust. Best of all, the payment of income taxes by the grantor is not considered a gift for transfer purposes.

To qualify for charging a low interest rate (such as the federal mid-term rate), the note will usually be written to last from three to nine years (referred to as a “mid-term” note as it is neither short-term nor long-term). Also, it should be properly documented with reasonable terms. It is a good idea to have separate representation of the grantor and the IDGIT, including actual negotiation of the terms of sale.


In many respects, a sale of assets on an installment note to an IDGIT is similar to a gift of assets to a GRAT. In a GRAT, the present value of the annuity payments to the grantor reduces the amount of the taxable gift, but the annuity payments, if not fully consumed, return value to the grantor’s estate. In an installment-note sale to an IDGIT, principal and interest on the note are paid back to the grantor over time and this also returns value to the grantor’s estate. However, when structured properly, using the following techniques, this repayment can be a substantially reduced amount. This, in turn, leaves more for heirs.

The Seed Gift

To help support the installment note and the viability of the strategy, it is advisable for the grantor to make a small seed gift to the IDGIT. It is generally recommended that this gift be at least 10 percent of the value of the assets to be sold. The seed property is important because the trust needs to have a measure of independence from the grantor. Also, it should not appear that the income distributed from the property sold to the trust is the sole source of funds being used to service the entire note. If the seed gift is too small, the IRS may treat the sale as a gift (not a desired result).

Sale of a Discounted Asset

The benefit of the IDGIT strategy can be further enhanced if the grantor utilizes the valuation discounts that are available for certain assets including shares in a corporation, units in a limited liability company or family limited partnership interests. Nonvoting shares, limited liability company units or limited partnership interests are given or sold to an IDGIT at their value as determined by a valuation professional. Generally, the fair market value of such interests is adjusted downward from their pro rata value of the underlying assets of the business entity. This is due to valuation discounts resulting from either lack of control, lack of marketability, or both—relative to those interests. If the interests are sold to an IDGIT, the valuation adjustment reduces the principal amount of the note while increasing the effective yield to the trust from the true value of the underlying assets.

Leverage with Life Insurance

The real power of this strategy comes when the trustee of the IDGIT uses the excess income created in the IDGIT to purchase life insurance. The income earned by the IDGIT over and above the amount needed to pay the installment note can go toward life insurance premiums on the life of the grantor, a beneficiary or some other relative. The premium payments will not result in gift taxes because the premiums are paid from trust income. The amount of insurance purchased can be substantial and can significantly increase the value of the trust assets that will eventually pass to the beneficiaries.

For example, Molly and Rick Crall (ages 70 and 66, respectively) were made aware of the fact that the anticipated excess income on the assets in their IDGIT would support a premium of $125,000 ($200,000 – $75,000) without the extra cash flow achieved through discounting or $155,000 ($200,000 – $45,000) with discounting. The smaller premium amount would be sufficient to fund a second-to-die insurance policy with a death benefit of approximately $6 million and the larger a death benefit of approximately $8.5 million, on Rick and Molly Crall (based on good health ratings and current assumptions of interest, mortality and expenses). On the death of the couple, the entire death benefit plus the value of the assets in the trust, including any direct gifts, would be available for the beneficiaries and exempt from both estate and GST tax.

Even without the discounted-sale approach, if Rick and Molly died immediately after repayment of the note at the end of year nine, the IDGIT would hold assets with underlying values in excess of $7.7 million ($1,400,000 appreciation on real estate + $390,000 seed capital and appreciation on seed capital + $6,000,000 insurance), 30 times the amount originally given as seed money to the trust and upon which the GST election was based. In other words, the $7.7 million is available for multiple generations with no further gift, estate or GST taxes, and only $250,000 of Rick and Molly’s combined $10.68 million GST tax exemption (as of 2014) was used. If Rick and Molly were to use the discounted sale approach, the total value transferred is substantially higher at more than $11.2 million.

Planning Risks

The income tax consequences of the premature death of the grantor are unknown. If the grantor dies while the installment note remains unpaid, the grantor’s estate may owe income taxes on any unrecognized gain in the transferred assets. The premise is that the IDGIT is no longer a grantor (defective) trust at the time of the grantor’s death. Therefore, the grantor’s estate would be taxed on the gain attributable to the unpaid portion of the note. On the other hand, it can also be argued that the grantor’s death should not be treated as a taxable event and the tax basis in the transferred assets would be carried over to the trust or its beneficiaries in the event of a subsequent sale. Whether gain should be recognized upon a grantor’s death is an unresolved issue at this point. However, in many instances the prospect of income taxation will not be significant to the beneficiaries of the IDGIT. In any event, if the beneficiaries sell assets, they would be subject to capital gains tax.

Another possibility is that the note will be considered what is called income in respect of a decedent, in which case the recipient of the note payments is subject to income tax on the remaining payments. Thus, like a GRAT, the note term should not extend beyond the grantor’s life expectancy; if it does, adverse tax consequences may apply. It is also possible that the grantor’s death will have no adverse income tax consequences. This is an unsettled area of the law.

The Repeal of the Estate Tax

The hot issue over in Ohio right now is the repeal of estate tax by 2013. There are those who want estate tax removed and there are others who want it retained.

An estate or inheritance tax is levied on an heir’s inherited assets if the value exceeds a threshold set by the state. In Ohio’s case, the exclusion limit is set at $338,833.

A coalition, called Protect Ohio’s Communities, contends that the estate tax constitutes a significant portion of the state’s budget. Repealing estate tax will adversely affect community services. Further, to make up for the lost budget, some other area will only be taxed or existing taxes will be raised.

On the other hand, Sen. Grendell supports the repeal of the estate tax in Ohio. To quote, it is “socialist and un-American.” He maintains that taxing estates has caused residents to move to Florida. And since this tax is dependent on deaths, the annual amount cannot be consistent hence should not be relied on to fund community services and expenses.

The House bill 153 for the repeal of the estate tax is now being considered by the Senate.

The battle continues in Ohio, while Florida continues to enjoy freedom from a separate state estate tax. The Economic Growth and Tax Relief Reconciliation Act of 2001 ensured that a separate estate tax would not be levied on Floridians without voter approval. When the Act went into effect, Florida opted not have another form of taxation to replace it.

Ohio, like a handful of states, is waking up to the reality that reducing taxes is a way to create jobs and keep people from moving to other states like Florida which are much more tax friendly. Ohio and the rest of the “rust belt” states need to focus on what is best for their residents. In my opinion, they should start by reducing taxes and the size of government. If they don’t more people will flock to states like Texas and Florida where the burdens imposed by government are much less severe.

To learn more about Florida’s taxation (or freedom from it), read Chapter 2 of the Florida Domicile Handbook.

Florida Business Taxes

Despite the fact that there are a little over thirty kinds of taxes that a Florida business can be subjected to, there are only five that need to be studied if you are planning to start up or move your business to any Florida county. These five taxes are the sales and use tax, discretionary sales surtax, unemployment tax, communications services tax and corporate income tax. These are imposed on a majority of business in the state of Florida.

Starting a business can be difficult whichever state you choose. Fortunately, there are many local agencies such as the Small Business Administration (SBA) who can help new residents with their businesses whether its a new or relocated from another state. You can also approach the appropriate government agency. The Department of Revenue has several service centers that give you the advice and direction you need if you are thinking of starting a business, whether big or small, or if you are shopping for a new location for your business. You can attend one of the educational seminars which they host around the state from time to time. You can get in depth information about the taxes imposed on Florida businesses. Get in touch with DOR Taxpayer Services to get a complete list of required business taxes.

In the Florida Domicile Handbook, you will find more information about the opportunities for financial growth as a Florida domiciled resident. You can also find contact information on agencies that can help you, including the DOR Taxpayer Services, in the book.

Documentary Stamp Tax

Documentary stamps are imposed on documents drawn to serve as promissory notes, mortgages, security agreements and other written agreements to pay money. In a real estate transaction, deeds are attached with actual stamps to show that the said document has paid its due to the county. Cash payments are not levied with this kind of tax. Basic amount of the doc stamp tax is 35 cents per $100 while documents that transfer an interest in real property are charged 70 cents per $100 or any portion thereof. Transfer of interest in real property documents include warranty deeds, quit claim deeds and contracts or agreements for a deed among others. For bigger loan amounts, tax is flat rated at $2,450. That is the maximum amount of expenditure for documentary stamp tax.

To illustrate, for a promissory note of $40,000 which is eligible for the basic documentary stamp tax of 35 cents per $100 the computation would be as follows:

Tax = $0.35 × ($40,000/$100) = $140

For a transfer of interest on a $1 million parcel of Florida real estate, 70 cents per $100 in documentary stamp tax will be paid. Calculation of tax will be as follows:

Tax = $0.70 × ($1,000,000/$100) = $7,000

For more information on documentary stamp tax and other related topics, grab your copy of “Florida Domicile Handbook” or subscribe to our blog at

Discretionary Sales Surtax

Discretionary Sales Surtax is levied on most transactions which are subject to sales and use tax and is imposed by some Florida counties under specific conditions. Surtax ranges from 0.25 to 1.25 percent and is added to the 6 percent state sales tax. The exact amount is defined by the specific county where the service or merchandise is delivered.

The first $5,000 of any tangible property sold as a single item is subject to discretionary sales surtax. Single items are defined as items normally sold in bulk or items that add up to a single unit. Commercial rentals, transient rentals or services are exempted from the $5,000 limit. If the items are sold individually and not normally sold as a set, it cannot be merged to qualify for the $5,000 limit. These items are taxed at the normal surtax rate for single items.

To illustrate, assume that a piano is sold for $6,000, delivered to a home in Florida county and imposed a 1 percent discretionary sales surtax. Computation will be as follows:

$6,000 × 6% (sales tax) = $360
$5,000 × 1% (surtax) = +$50
Total tax due = $410

Any item, such as an automobile, boat or aircraft, bought in the name of a Florida resident in a Florida county will be charged the appropriate surtax county rate by the dealer. For example, if you bought a car titled to your name for $35,000 in 2006, sales surtax computation will be as follows:

$35,000 × 6% (sales tax) = $2,100
$5,000 × 1% (surtax) = +$ 50
Total tax due = $2,150

More information on Florida county discretionary sales surtax with the updated dates of implementation are found in Form DR-15DSS of the Florida Domicile Handbook or click here to buy. For the appropriate forms, visit or contact Florida Department of Revenue.

click here to buy

No Income Tax

In my last blog post, I answered a question from a man in Massachussets about capital gains tax. As explained by co-author Brad Galbraith, capital gains tax is a part of income tax, which, under Florida law there is none! A domiciled resident of Florida is only obligated to pay FEDERAL income tax, so capital gains would be reported for federal income tax purposes. There is no separate Florida income tax form to fill out. Period!

Topping the list of reasons – aside from the amazing weather – why a permanent move to Florida is a good idea is no state income tax. In fact, the Florida Constitution prohibits the imposition of a state income tax. And unless the people vote to have a state income tax, it is doubtful that there ever will be one.

Interestingly, there are only eight other states in the entire US that do not impose personal income tax: Alaska, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. In Florida, no state income tax means that any revenue generated from employment or investments are free from government deductions and/or levies. On the other hand, if you decide to move to Vermont, for example, your state income tax will range from 3.6 to 9.5 depending on the amount or level of income.

Here’s another example: Let’s take a married couple who have an individual income of $70,000 and a combined interest income of $150,000 which amounts to a total adjusted income (AGI) of $150,000. In Florida, this couple will get to spend a total of $150,000 should they choose, if they have no itemized deductions. However, in other states, total earnings will not be as much.

Michigan tax = $6,525 (flat tax at 4.35% of $150,000)
California tax = $11,323 (graduated tax)
Pennsylvania tax = $4,605 (flat tax at 3.07% of $150,000)

Further, Florida residents enjoy tax-free income sourced from work or property in other states either as salary or real estate rental earnings. Other states however, will be imposing their own income tax on those same earnings. That means, your earnings as a Florida resident are free to grow and be reinvested without an additional state-imposed income tax.

For more information on taxes in Florida, purchase a copy of The Florida Domicile Handbook or email

Does one have to file a state tax return if ‘gains’ occurred during the year?

A few days ago, I received a letter from a gentleman in Massachusetts who purchased the Florida Domicile Handbook through our website in order to learn about the benefits of becoming a permanent Florida resident.

He was particularly concerned with Chapter 2: Florida Taxes, and felt the chapter lacked a full explanation of what state taxes could be expected. More specifically, he was confused over how Florida taxed capital gains. His questions were:

“Does one have to file a state tax return if ‘gains’ occurred during the year? If so, at what rate is the ‘gain’ taxed?”

We’ve encountered this question before as the idea of a state (Florida) electing to not impose a tax that other states (like Massachusetts) fully enforce is incomprehensible to many Americans, especially those that have lived full lives in a place where they have adjusted to paying a separate state income tax.

With co-author Brad Galbraith’s help, we satisfied the man’s concern with the following response:

A capital gain tax is simply a type of income tax. One of the main advantages of becoming domiciled in Florida is that residents are not obligated to pay a state income tax. There simply is no separate state income tax – a Florida resident is only obligated to pay federal income tax on capital gains.

Essentially, “no income tax” in Florida means:
* no long term capital gains tax,
* no short term capital gains tax,
* no tax on dividends,
* no ordinary income tax,
* no alternative minimum tax.

Want to know why nearly 1,000 people move to Florida every year? Purchase the book HERE.