Florida Inheritance Tax Rate
The Florida inheritance tax rate is zero percent. There is no estate tax in Florida, and there is no inheritance tax in Florida. People who die in Florida will not owe any estate or inheritance taxes to the state of Florida. This lack of inheritance tax, combined with the absence of any Florida income tax, makes Florida one of the most attractive states in the country in terms of overall tax burden.
While most states do not have an estate or inheritance tax, Florida is unique in that the state constitution expressly disallows these taxes. In other words, the Florida state legislature cannot itself enact a Florida estate tax or inheritance tax—there would have to be a constitutional amendment, something that is much more difficult to accomplish.
On the other hand, under federal law, the estate tax is imposed on the taxable estate of every decedent who is either a citizen or resident of the United States. The determination of the amount of estate tax due is, like most taxes, based on the computation of a taxable amount multiplied by a progressive tax rate. In all cases where estate tax is due, a Form 706, Estate Tax Return, must be filed. The estate tax return must be filed within nine months after the decedent’s death, although an extension of an additional six months is generally granted upon the filing of an application for extension.
The federal estate tax rate is 40%. But this estate tax only applies to estates worth more than approximately $11.6 million (and approximately $23 million for married couples). Because the exemption limit is so high, almost nobody has to worry about the estate tax.
Keep in mind a Florida resident who dies may still owe an estate tax for property located in other states. For example, if someone who dies in Florida owns valuable property in another state that pushes the entire value of the estate beyond the estate tax limit, then that person’s estate may owe tax in the other state.
Difference Between Estate Tax and Inheritance Tax
In terms of federal taxes, an estate tax is owed by the decedent’s estate before anything is distributed to the beneficiaries. An inheritance tax, by contrast, is owed by the person who inherits from the estate. So the difference depends on who owes the tax.
However, a properly drafted Florida will or living trust will often direct the personal representative (or executor) of the estate to pay any inheritance tax that may be owed by a beneficiary. That way the beneficiary isn’t stuck with a large tax bill on what is inherited.
Estate Tax Unified Credit
Each U.S. citizen may exempt from estate taxation asset transfers up to approximately $5,400,000 (2017). Recently, the estate tax law was changed so that a decedent’s estate tax exemption may be applied against lifetime gifts and after death bequests by will or trust. For married couples, any part of the $5.4 million credit which is not used by the first spouse to die may be carried over to the surviving spouse. The carried over credit is referred to as the Deceases Spousal Unused Exclusion (“DSUE”).
To take advantage of the DSUE the law requires the surviving spouse to file a federal estate tax return, Form 706, upon the death of the first spouse and properly elect DSUE on the Form 706. Preparing a Form 706 is complicated even for smaller estates and families should expect to pay significant legal and accounting fees.
Florida Estate Tax Planning
Florida estate tax planning has income tax consequences to the extent the gross estate includes assets that have appreciated in value. Assets left to a surviving spouse after application of the deceased spouse’s unified credit acquire a stepped up value basis to the date of the first spouse’s death.
If these assets are sold either by the surviving spouse or later by children there the assets will be subject to capital gains tax (about 20%) on the appreciation from the date the assets were purchased by the deceased spouse; there is no step up in tax basis. The surviving spouse does not pay income tax on assets acquired from their spouse when the assets are shielded from estate tax using the marital deduction.
When children inherit those same assets upon the second spouses’s death the children’s income tax basis is “stepped up” to the asset values on the date of the surviving spouse’s death. For couples with estates under the $5.4 million credit it makes sense to pass all assets to the surviving spouse.
However, if assets continue to appreciate to the point where the surviving spouse’s assets increase in value above the combined tax credit (approximately $11 million) then the excess value will be subject to estate tax at approximately 40%.