Relocating to Florida Part II:  Understanding Death Taxes When I own Real Property in Florida and Pennsylvania

Flamenco Beach CulebraIf you live in Florida and own real property in Pennsylvania or another state, or are looking to change your domicile to Florida, but wish to retain a residence in another state, you may be surprised to learn that you could be subject to state death taxes for property you own outside of Florida.

What is a State Death Tax?

Fifteen states (including the District of Columbia) impose an estate tax and six states impose an inheritance taxEstate taxes are charged against the estate regardless of who inherits the assets.  Inheritance taxes are levied on the transfer of assets to heirs, based on the relationship of the heir to the decedent. Florida does not impose a state death tax. Pennsylvania, however, is one of the states that does impose an inheritance tax.

The current federal estate tax exemption is $5,450,000 (double for a married couple) and is scheduled to increase to $5,490,000 in 2017, making it applicable to only the very wealthy. However, the state tax exemption for northern states may be as little as $675,000. This means that an individual who dies domiciled in one of the 15 states that imposes a state estate tax may owe substantial estate tax, even if they are exempt from federal estate tax.

What about Pennsylvania Death Taxes?

Pennsylvania does not impose a state estate tax. However, it does impose an inheritance tax with a maximum rate of 15 percent. As stated earlier, inheritance tax is based on the relationship of the heir who will inherit the decedent’s property.

What if I become a Florida Resident, but I continue to own Pennsylvania Real Property?

A person who dies a Pennsylvania resident owning real property in both Pennsylvania and Florida, will be subject to Pennsylvania inheritance tax for all taxable property owned at the time of his death (excluding the Florida property). The Florida property is not subject to tax because Florida does not have any state death tax.

If that same person changes his domicile to Florida and later dies a Florida resident, his estate is not subject to state death tax because Florida does not have any state death tax.  However, because the person did own real property in Pennsylvania, his Pennsylvania real property would be the only asset subject to Pennsylvania inheritance tax.

Example:  John dies owning assets that total $5,000,000 including a Florida residence valued at $1,000,000 and a Pennsylvania residence valued at $400,000. He leaves everything to his daughter. There is no federal estate tax issue since John’s estate is under the federal exemption amount.

A. If John was a Pennsylvania resident, John’s estate would owe $180,000 in Pennsylvania inheritance tax [taxable estate (less Florida residence) at $4,000,000 x 4.5% child tax rate = $180,000 tax].

B. If John was a Florida resident, John’s estate would have to file a Non-Resident Pennsylvania Inheritance Tax Return for the Pennsylvania residence only. John’s estate would owe only $18,000 in Pennsylvania inheritance tax [Pennsylvania residence at $400,000 x 4.5% child tax rate = $18,000 tax]. Compared to Paragraph A above, this is a difference of $162,000 in tax savings.

C. If John was a Florida resident and did not own any real property in another state, John’s estate would owe -0- state death tax.

When planning ahead, what should I consider?

  1.  Is the property subject to a state death tax? In determining whether you hold property that is subject to state death tax, you must determine: (a) where you are domiciled; (b) which states you own real property; and (c) whether that state has a death tax.
  2. Will your existing estate plan inadvertently result in state death taxes being due upon your death? Many estate plans are drafted to minimize Federal estate tax liability and may overlook potential state death tax issues. Due to the difference in the state and Federal estate tax exemptions, an estate plan that results in no Federal estate tax may result in state death taxes being due.

The purpose of this Article is to give an overview of this topic when deciding to become a Florida resident.  There are many complexities involved including tax issues. It is imperative for you to discuss with your tax advisor and attorney who is licensed to practice in the State of Florida prior to your change of domicile and the sale of any residence in another state.

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