Tag Archives: exemption

Planning to Live Beyond 2025? How You Can Still Enjoy Estate Tax Reform’s Sunset Special

The just-enacted Tax Cuts and Jobs Act doubles the federal estate, gift, and generation-skipping transfer lifetime tax exemptions through 2025. The exemptions revert to their pre-Act levels on January 1, 2026. Ignoring inflation adjustments, the combined exemptions for a married couple will then fall from over $22 million to $11 million. At the 40% Federal transfer tax rate, a 2026 sunset will increase a married couple’s estate tax by $4.4 million.

Do you want to avoid $4.4 million of estate tax, even if you plan to celebrate the 2026 New Year amongst the living?

A married couple can permanently harvest the increased exemptions by gifting assets with value up to the full $22 million exemption amount before 2026. If you gift into a generation-skipping trust, the exempted assets can pass through many generations free of transfer tax. With valuation discounts for lack of control and lack of marketability still fully available, family business assets are particularly attractive for gifting.

A taxpayer can not use the increased exemption until he or she first make gifts exhausting his or her pre-Act exemption. An individual does not create an additional tax benefit until he or she first gifts about $5.5 million worth of property. A couple does not capture the full additional benefit until they give away property worth over $22 million.

These ordering rules create an obstacle for many, who can not afford to give away that much property. Married taxpayers in that situation may consider funding “Spousal Lifetime Access Trusts.” Each spouse gifts assets to a trust for the other spouse, leaving the gifted assets available to the beneficiary spouse for his or her lifetime. When the beneficiary spouse dies, the remaining trust assets pass to children or other beneficiaries free of estate tax. Persons who created such trusts shortly before 2013, when another legislative sunset almost reduced the lifetime exemptions, can fund their existing trusts with additional gifts.

Many families will wait until 2026 is closer before taking action. Families with sufficient wealth to afford substantial gifting, who also expect estate tax liability even with the increased exemptions, should consider gifting sooner, to remove appreciation in the gifted assets before 2026 from their future taxable estates.

For more information regarding the Tax Cuts and Jobs Act, follow these links:

E. John Wagner, II

Is an Unintended Documentary Stamp Tax Loophole Depriving Florida of Tax Revenue?

A recent newspaper account presents evidence and concludes that a loophole in Florida’s real estate transfer documentary stamp tax deprives the state of substantial revenue it should collect. But the account reaches the conclusion without considering all the data. Why? The state collects this tax revenue in two ways, but the newspaper’s review appears to consider only one of them. Here is a question-and-answer formatted explanation:

What is the Florida documentary stamp tax on real estate transfers?

Documentary stamp tax is imposed on the consideration paid on Florida real estate transfers, such as cash paid for a transfer by deed. Taxable transactions also include indirect real estate transfers through sales of interests in trusts and business entities (such as corporations and LLCs) holding real estate. A change in the law several years ago required that documentary stamp tax be paid on the sale of an interest in a business entity if the business entity’s real estate was acquired in an exempt transaction within the three years prior to the sale. Sales of interests in land trusts holding real estate are taxable without regard to the length of time the trust held the real estate.

Documentary stamp tax is imposed at the rate of $700 per $100,000 of consideration. For example, the documentary stamp tax on a $300,000 sale transaction is $2,100.

Are there legitimate exceptions to the tax?

Yes. For example, a deed of unencumbered property transferred between spouses, as a gift, by a trust to the trust beneficiary, or by a business entity to an affiliate with the same ownership in a reorganization is not subject to the tax. These transfers are exempt by statutory and regulatory design, not because they are part of an avoidance scheme the Legislature or Department of Revenue did not intend to allow.

How is the tax paid?

When documentary stamp tax is due, it is paid one of two ways.

Usually, when the consideration is given directly for a deed, the tax is delivered to the county Clerk of Court when the deed is recorded in the county real estate official records. The Clerk of Court then remits the tax to the Department of Revenue in Tallahassee. When this procedure is followed, anyone can view the deed in a publicly accessible database and see the tax amount delivered to the local Clerk of Court.

When the consideration is given for an interest in a trust or business entity holding real estate, the tax is paid differently. No tax is shown on the deed because the deed initially transferring the property to the trust or business entity is not subject to tax. However, when the trust or business entity interest is later sold, the taxpayer delivers the tax directly to the Department of Revenue in Tallahassee. The Clerk of Court does not receive or remit any payment, and the documentary tax stamp payment does not appear in any publicly accessible database.

How was the newspaper account incomplete?

The newspaper’s reviewer analyzed deeds recorded in the local Clerk of Court’s office. In that analysis, the reviewer found deeds to trusts and business entities upon which no documentary stamp tax was paid.

The reviewer appears to have assumed that the failure to pay the tax to the local Clerk of Court on the initial deed meant that the documentary stamp tax was never paid on subsequent sales of trust and business entity interests. However, since tax on sales of trust and business entity interests is delivered to the Department of Revenue in Tallahassee rather than the local Clerk of Court, there was no reason to find evidence of documentary stamp tax paid in the Clerk of Court’s office. The newspaper account seems to have not taken this procedure into account, and to have assumed taxpayers were not paying the tax just because the evidence of payment is not publicly available.

The reviewer also appears to have assumed that all the transfers were connected to sales of trust or business entity interests shortly following recording of the initial deeds.Some of the transactions may not have been sales, but rather legitimately exempt transactions. A deed could have been between business entities with identical ownership as a part of an internal reorganization, without a subsequent sale of an entity ownership interest. Such a transfer is supposed to be exempt, because beneficial ownership of the real estate does not change.

Without public review, how does the state know the tax is paid when it should be paid?

Few tax collection processes are open for inspection by the general public. It is the Florida Department of Revenue’s job to audit these transactions.

In our experience, the documentary stamp tax audit rate is high. Auditors can easily identify the initial deeds upon which no tax is paid. The auditors then require the taxpayers to prove they paid the tax directly to the Department of Revenue in Tallahassee on a subsequent indirect non-deed transfer. So even though the citizenry cannot independently confirm documentary stamp tax has been paid, there should be no greater concern about tax fraud in these transactions than there is for tax collection generally.

E. John Wagner, II