International Tax Changes Effect on Florida Inheritance Laws

Presently, there are no estate taxes in the state of Florida, but that has not always been the case. Until 2004, state-level collection of the estate tax was part of the probate process. However, that changed as Florida made way for new policies and modern standards.

Before then, it was called a “sponge” or “pick-up tax,” and it was a fraction of the federal tax bill for an entire estate.

Today, there’s no state-level inheritance tax in Florida.

This tax falls upon individual beneficiaries as opposed to an estate tax which is factored in from the total estate value. However, if you inherit property from a state with any of these taxes, you’ll still have to pay them. Even if you live in the state of Florida, you’ll pay taxes in the location of the estate and corresponding probate.

You may also incur additional expenses regardless of being a Florida resident. However, there are exceptions which depend on the closeness of the relationship to the deceased.  

So does that mean that international tax changes are inconsequential for Florida residents?

While the state itself doesn’t charge an estate tax, the federal government does.

Going by the “Tax Cuts and Jobs Act” (TCJA) accented into law by President Donald Trump, $11.4 million is the federal estate tax exemption.

Anything over that can be taxed up to 40%. However, married couples get extra leeway allowing for up to twice the exemption. Sums above these thresholds can invite a levy of between 18 and 40% which is entirely dependent on the courts and the quality of representation you hire.

This legislation will hold until 2025, the likely remainder of Donald Trump’s presidential term. At that time the laws may revert to the initial amounts, factoring in contemporary costs of living. Alternatively, the next president-elect may provide additional tax incentives but that is entirely unpredictable.

International tax changes and their implications

1) Mandatory returns

For cumulative offshore earnings, the mandatory repatriation fees encompass a “transition tax.”

This tax is a one-off affair. It applies to specified foreign corporation shareholders with at least 10% ownership. Additionally, the tax is levied whether the earner is living or deceased. In other words, untaxed foreign earnings of certain specified foreign corporations must pay a tax as if those earnings had been repatriated to the United States.

Since this affects many who have a large estate, international business, or diversified portfolio, the amount due is quite a sizeable one. Thus, once the earner receives deductions, the tax rate is 15.5% on the earner’s portion of the liquid holdings, and 8% on non-liquid holdings, ie. real estate.

Affected parties also have the option of paying in installments within an eight-year window. Those installments break down as follows:

  • 8% tax for each of the first five installments,
  • 15% tax for the sixth installment,
  • 20% tax for the seventh installment, and
  • 25% tax for the eighth installment.

2) Territorial tax system

Previously, residents and citizens living in the US were under the umbrella of a global taxation system when it came to international earnings.

In other words, taxation for a business’ entire income took place in the United States.

Presently, however, a territorial tax system has taken effect. This means that the taxes are levied based on jurisdiction-specific income. Furthermore, earnings arising from foreign subsidiaries of a native firm (US-based) are in the clear. They are essentially exempt under these regulations.

This model also comes with a “participation exemption,” but that only applies to C corporations.

In summary, let’s say you inherit your father’s international chicken coop business. You will only pay standard sales taxes, estate taxes if you’re past the exemption limit, court fees to legally acquire the business, etc.

However, you will not have to pay a transition tax on the money in his business account or foreign property owned by the business. As long as the business has a home base in the US, it will be subject to standard taxation.

3) Anti-deferral provisions expansion

The GILTI, or Global Intangible Low-Taxed Income, exists in an effort to prevent the offshore holding of earnings.

It effectively addresses a loophole of the territorial tax system.

In short, a business will pay lower taxes on earnings as the result of “technically” being based in a low-tax US jurisdiction. You may have seen companies like this where the customer service reps, warehouses, etc are offshore – but the company has a technical headquarters with a PO Box in the US.

Dealing with companies like this can be very frustrating for consumers, and without GILTI it could be even worse.

Members of Congress expect that firms will migrate to low-tax jurisdictions to avoid paying high taxes. When this occurs, it makes it even harder for a business to be transparent. The GILTI helps to prevent this workaround, taxing businesses that hold offshore earnings, regardless.

Intangible income aside, GILTI also takes into account further taxing of depreciable tangible property in line with certain conditions.

4) High-margin export relief

In a bid to provide incentives to encourage the return of profits back to the home country, the IRS offers high-margin export relief. High-margin exports, intangibles, and services will face reduced tax obligations.

As with the above scenario, this deduction is exclusive to C corporations. They can expect to see a 13.125% tax rate regarding such income.  

If you think about this from the government’s perspective, taxes help support infrastructure, national security, tourism, and development. When companies pay lower taxes through workarounds and loopholes, it helps the individual but hurts the overall economy. Especially when the cash isn’t liquid or when the business owner does not use it domestically.

An experienced Florida probate lawyer can assist you with these tax implications in the case that you inherit a foreign business. To determine further what you stand to gain or lose, given the revised international tax laws, contact our office today.