Did an out-of-state trustee keep trust assets outside Florida intangible tax when the Florida grantor could veto investment changes and replace the trustee?

Plain-English summary

Florida taxed the trust's taxable intangible assets to the resident grantor because the grantor retained control over investment decisions and the trustee.

The proposed irrevocable trust had an out-of-state individual trustee, a 13-month term that could be extended in additional 13-month periods, and assets stated not to have Florida situs. The grantor was also the beneficiary but was described as lacking a taxable beneficial interest.

Those facts did not overcome the grantor's retained authority. The trustee could not change investment strategy, asset allocation, or invest in dissimilar assets without advance notice and the grantor's written consent. If the trustee changed the pattern without consent, the grantor could remove and replace the trustee.

The Department treated those rights as continuing ownership and control under sections 199.052 and 199.175. Its operative conclusion was that the grantor was subject to Florida intangible tax on the taxable trust assets.

The request also proposed that a contribution just before January 1 and distribution soon afterward should not be taxed absent evidence of a sham. The Department's published response did not separately adopt that proposed conclusion; it found the grantor taxable because of retained control.

What this means for you

Grantors creating out-of-state trusts

An out-of-state trustee and foreign situs language do not eliminate Florida tax if the resident grantor keeps practical control over investments or trustee tenure.

Trustees and investment advisers

Consent rights, investment-pattern restrictions, and removal provisions are substantive control facts. They should be reviewed together rather than treated as routine administrative protections.

Accountants and tax professionals

Distinguish a taxpayer's requested ruling from the Department's actual response. Here the request listed several favorable propositions, but the operative holding rejected the exemption on control grounds.

Common questions

Q: Was the trustee outside Florida? A: Yes.

Q: Did the request state that the trust assets lacked Florida situs? A: Yes, but the Department still found the Florida grantor controlled them.

Q: What investment right did the grantor retain? A: The trustee needed written consent before changing strategy, asset allocation, or investing in dissimilar assets.

Q: Could the grantor replace the trustee? A: Yes if the trustee changed the established investment pattern without consent.

Q: Who owed the tax under the Department's conclusion? A: The grantor, as owner and controller of the taxable trust assets.

Q: Did the Department separately approve the year-end contribution and post-January 1 distribution proposal? A: The published response did not. It resolved the ruling against the grantor based on retained control.

Q: Can another trust rely on this TAA? A: Not automatically. The advisement states that it binds the Department only on the consent, investment, removal, term, trustee, and asset facts described.

Citations and references

• Fla. Stat. § 199.023(7) — taxable beneficial interest
• Fla. Stat. § 199.052(1) — filing based on ownership, management, or control
• Fla. Stat. § 199.175(1) — Florida taxable situs
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-119

Original ruling text

Nov 13, 1996

Re: Technical Assistance Advisement No. 96(C)2-119 Intangible Tax Personal Property Tax; Irrevocable Trust - Taxable Situs Sections 199.023(7), 199.052(1) and 199.175, F.S. XXX (Trust) XXX (Grantor/Beneficiary) XXX (Trustee)

Dear :

This is in response to your recent request for a Technical Assistance Advisement in which you ask whether Florida intangible personal property tax imposed by Chapter 199, F.S., is imposed upon an irrevocable trust, created by a Florida grantor/beneficiary, having an out-of-state trustee.

Facts

The grantor is a Florida resident. Grantor will contribute assets to the irrevocable trust for a period of thirteen months and, by written extension of notice to the trustee, for a period of additional terms of thirteen months. Grantor is also the beneficiary of the Trust, but does not have a taxable "beneficial interest" in the Trust, as defined in s. 199.023 (7), F.S. Trustee of the trust will be an individual who resides outside of Florida. Trust assets do not have Florida situs.

Requested Ruling

1. The Trustee of the Trust has no liability for the
   Florida intangible tax if the Trustee is not a resident of Florida and the Trust's assets do not have Florida situs; and
2. The Grantor/Beneficiary of the Trust will have no
   liability for Florida intangible tax with respect to the intangible assets owned by such Trust.

3. A distribution of Trust assets soon after January 1, if made, or even if contributed to the Trust immediately prior to January 1, will not cause the Trust assets to be taxed to the Grantor/Beneficiary in the absence of some evidence (other than the mere passage of time) that the contribution and subsequent distribution constituted a sham transaction.

However, where the Trust instrument contains a provision that:

... Trustee may not alter the investment strategy (or asset allocation) and/or invest in dissimilar assets unless Trustee notifies Grantor in writing at least 10 days prior to such investment and Grantor consents to such investment in a writing delivered to Trustee. If Grantor does not consent to such, or if Trustee (without consent) alters the investment pattern in a manner which is inconsistent with Grantor's previously established pattern, then Grantor may remove the Trustee and replace it with a different individual.... or similar language, Grantor is exercising control over the Trust and as such is not exempt from the payment of Florida intangible personal property tax. Grantor/Beneficiary is taxable as owner of the intangibles by maintaining ownership and control.

Department's Position

Pursuant to s. 199.052 (1), F.S.:

An annual intangible tax return must be filed with the department by... every person, regardless of domicile, who on January 1 owns, controls, or manages intangible personal property which has a taxable situs in this state.... (e.s.)

Under s. 199.175, F.S., Taxable situs:

(1) Intangible personal property shall have a taxable situs in this state when it is owned, managed, or controlled by any person domiciled in this state on January 1 of the tax year....

The Grantor/Beneficiary of the Trust may remove the Trustee where Grantor disagrees with the investment strategy of Trustee. The Grantor/Beneficiary of the Trust is exercising control over the Trust. Therefore, the Grantor is subject to Florida intangible tax on the taxable assets held by the Trust.

This response constitutes a Technical Assistance Advisement under s. 213.22, F.S., which is binding on the Department only under the facts and circumstances described in the request for this advice as specified in s. 213.22, F.S. Our response is predicated on those facts and the specific situation summarized above. You are advised that subsequent statutory or administrative rule changes or judicial interpretations of the statutes or rules upon which this advice is based may subject similar future transactions to a different treatment than expressed in this response.

You are further advised that this response and your request are public records under Chapter 119, F.S., which are subject to disclosure to the public under the conditions of s. 213.22, F.S. Your name, address, and any other details which might lead to identification of the taxpayer must be deleted by the Department before disclosure. In an effort to protect the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response.

Sincerely,

M.E. Clemens, C.P.A.
Senior Tax Specialist
Tax Policy and Dispute Resolution
Office of General Counsel

MEC/mh