By: Randall A. Denha, J.D., LL.M.
It’s the dead of winter and you begin to wonder “why do I live in Michigan when the weather has to be better somewhere else?” Invariably, most of us begin to consider California, Arizona and Florida, to name a few other desirable places to live. Due to proximity, same time zone and a relatively easy flight, Florida seems to win each time. Florida is one of the most desirable retirement destinations in the world, and with good reason. It boasts a wonderful climate, miles of beautiful beaches, and many tourist attractions. But probably the greatest motivation for obtaining Florida residency is the range of tax advantages that it brings. Some of these include: no state income tax, no estate tax, generous homestead law to simply name a few.
The following are some additional advantages to a Florida residency:
1. Florida has no personal income tax. Florida is one of only seven states not to impose a personal income tax (the others being Alaska, Nevada, South Dakota, Texas, Washington and Wyoming; while New Hampshire and Tennessee only impose an income tax on dividends and interest income). Since Florida’s prohibition against state income tax is in their State Constitution, it would take an amendment to the Florida Constitution to impose a personal income tax, which seems hard to imagine ever coming to fruition. Additionally, Florida’s Constitution prohibits municipalities and counties from levying any personal income tax.
2. Florida has no state death/inheritance/estate tax. Florida has no estate taxes.
3. Exemptions from Creditors. Florida law generally provides a list of assets that are exempt from garnishment, levy and attachment by creditors to satisfy a judgment. In broad terms, some of the assets exempt from garnishment, attachment and levy are your homestead, cash surrender value of life insurance policies and the proceeds of life insurance policies, annuities, disability income, earnings and wages if you are a head of household, pension plans and retirement plans, and college savings plans such as Florida prepaid tuition, 529 plan or a Coverdell plan.
4. Tenancies by the Entirety. A tenancy by the entirety is a form of joint ownership for married couples only. This type of asset ownership affords excellent asset protection benefits. In Florida, in order to qualify as tenants by entireties property, the property in question must have the “5 unities”, which are: time, title, interest, possession and marriage. That is, the interest in the property for the spouses must have been created at the same time (time), in the same instrument (title), giving both spouses joint ownership and control (possession) and an identical interest (interest) in the property and they must have been married at the time this occurred.
Florida is unlike most other states in that Florida affords tenancy by the entireties protection to both real and personal property (tangible and intangible).
However, in the case where both spouses are indebted to a creditor, there is no tenancy by entireties property. Tenancy by entireties protection exists only if a creditor has a claim against only one individual of the married couple.
There is a presumption that all property owned jointly with a spouse is owned as tenants by the entirety. This form of asset protection is the easiest form of asset protection afforded to married couples, but it is not ironclad. For example, if one of the couple dies, upon death, the asset ownership automatically vests in the surviving spouse. Additionally, a divorce will convert the ownership to joint tenancy with right of survivorship, which affords no asset protection. In either case, creditors of the surviving spouse or those of both the divorced couple can seize those assets unless they are otherwise exempt.
5. Establishing Florida Residency and Homestead. Only Florida residents may take advantage of Florida’s liberal asset protection laws, the homestead provisions, and the absence of personal income or state estate taxes. So the question becomes, how does one become a Florida resident?
Florida courts have used a plethora of facts to determine whether an individual is deemed a Florida resident. Additionally, Florida courts often use definitions contained in Florida statutes and administrative code.
Florida law allows an individual to file a sworn Declaration of Domicile with the Clerk of the Circuit Court of the county in which that individual resides, which shows an individual’s intent to maintain the Florida residence as his or her permanent abode. Importantly, the statute does not prohibit contemporaneous ownership of property in another state, provided that the primary residence is claimed to be in Florida only.
Additionally, Florida law, which contains a definition of permanent residence as it is applied in determining the validity of homestead exemptions, states, “’permanent residence’ means that place where a person has his or her true, fixed, and permanent home and principal establishment to which, whenever absent, he or she has the intention of returning. A person may have only one permanent residence at a time; and, once a permanent residence is established in a foreign state or country, it is presumed to continue until the person shows that a change has occurred.”
Florida law states that “Intention to establish a permanent residence in this state is a factual determination to be made, in the first instance, by the property appraiser. Although any one factor is not conclusive of the establishment or non-establishment of permanent residence, the following are relevant factors that may be considered by the property appraiser in making his or her determination as to the intent of a person claiming a homestead exemption to establish a permanent residence in this state:
• File a declaration of domicile in the clerk of circuit court’s office in the county courthouse and send a copy to the appropriate taxing authority in your former state.
• Obtain a Florida driver’s license.
• Register to vote (and vote) in Florida. Do not vote or contribute to political campaigns in your former state.
• Apply for the homestead exemption if you own a residence in Florida.
• Transfer your out-of-state accounts to a bank in Florida.
• Arrange for any direct deposits such as Social Security to be deposited into your Florida bank account.
• Open a safe-deposit box at a Florida financial institution for the safekeeping of your securities and valuable documents. Close all safe-deposit boxes outside of Florida.
• Move all of your personal items with significant monetary or sentimental value to Florida.
• Change the address of record on all stocks, bonds and other securities to your new Florida address.
• If you have a brokerage account, move your account to the Florida office of your existing national brokerage firm or to a local brokerage firm.
• File your federal income tax return with the Internal Revenue Service processing center in Atlanta, Georgia, using your Florida address. File a final state income tax return as a part-year resident through the day you moved from your former state. Then, if you receive no income from your former state, stop filing state income tax returns. If you still receive income from your former state, file a nonresident income tax return for that portion of your income.
• Declare Florida your legal residence when you make or revise your will.
• Use your Florida address in all business and social correspondence.
• Identify Florida in written and oral communication as your permanent home.
• Sell any real property that you own outside of Florida.
• Invest in Florida real estate and businesses. Refrain from active involvement in businesses in your former state.
• Document the days you spend in every state, ensuring that you spend more time in Florida than any other state.
• Register all of your vehicles in Florida and return your old vehicle tags to the issuing state.
• Notify credit card companies and other creditors of your new address.
• Notify insurance companies of your new address and that your vehicles and valuable personal property are now located in Florida.
• Become active in Florida community or political organizations, religious institutions or clubs. Discontinue involvement in community or political organizations, religious institutions and clubs outside of Florida. Resign from private clubs in your former state or convert your memberships to nonresident memberships.
• Become a patient of a Florida doctor and dentist and have your records transferred to them.
• Purchase a cemetery lot or crypt in Florida.
• If you have a professional or occupational license and intend to continue working, obtain a Florida license.
• Change the address on your passport.
• Provide your Florida address to hotels at registration.
• Hold family gatherings in Florida.
• Subscribe to Florida newspapers and cancel subscriptions to newspapers in your former state.
Finally, there may be certain actions that you should take within the state from which you are leaving. For instance, some states require that paperwork be filed with their appropriate agencies that show an intent to establish residency in another state. This is important since many states are currently experiencing budget shortfalls and look for every opportunity to generate income and may attempt to tax your estate by claiming you are still a resident of that state. New York is notorious for this. Thus, it is prudent to find a competent attorney in your previous state to comply with any of those requirements.
Many clients whose family circumstances and employment situation permit them to spend in excess of six months every year in Florida may elect to become Florida residents. The biggest advantage, compared to being Michigan residents, is that Florida has no state income tax. So-called “earned” income, such as salaries, will continue to be taxed in the state in which they are earned, but “unearned” income such as dividends, interest, rents, and retirement benefits will not be subject to state income tax if the recipient is a Florida resident.
The biggest perceived disadvantage to changing legal residence to Florida is that both Michigan and Florida permit only residents to claim a homestead exemption, so a change in residence to Florida results in loss of the Michigan homestead exemption (now referred to as the “Principal Residence Exemption”). The principal residence exemption exempts your principal residence from the local school district tax up to 18 mills. Mills are the taxes per each $1,000 of assessed value of your home. Therefore, if the assessed value of your Michigan residence is $300,000 (i.e. an assumed fair market value of $600,000), and your local school millage is the maximum 18 mills, the principal residence exemption would save you $5,400 in property taxes.
Finally, one change suggested by virtually every Florida attorney who addresses the topic of changing your residence is signing new Florida Wills and Trusts. This is not essential. An estate plan that is valid where it was signed is valid anywhere. The only Florida requirement that might trip you up is naming a non-family member or a bank not qualified to do business in Florida as your Personal Representative or Trustee. This would suggest a change in your documents. Also, if your estate plan includes irrevocable trusts that are taxable in Michigan, you should explore changing the situs of the trusts to Florida to avoid Michigan income tax.