Did a testamentary trust or its Florida income beneficiary owe intangible tax when two of three co-trustees lived outside Florida and majority approval was required?

Plain-English summary

Florida concluded that the testamentary trust had no Florida taxable situs and that its Florida income beneficiary did not have to report the trust's intangible assets for 1994 or later years.

The trust always required at least three trustees, with every action approved by a majority. Two trustees lived in New York and one—the sole lifetime income beneficiary—lived in Florida. No trustee could act alone. Under the rule for three or more resident and nonresident trustees sharing management and control, the nonresident majority kept the trust outside Florida situs.

The Florida beneficiary received all trust income, and principal could be distributed for her benefit. But she could not demand or unilaterally approve a principal distribution, revoke the trust, or appoint successor beneficiaries without limitation. Any principal invasion required a majority trustee decision, so her trustee role did not give her the taxable beneficial interest defined by the statute and rule.

The Department noted that subsequently appointed trustees had power to fill vacancies if the trustee count fell below three, creating some potential to affect future control. It nevertheless issued the no-tax responses on the stated three-trustee and majority-approval facts.

What this means for you

Co-trustees

For the rule applied here, residence and actual management authority mattered together. A nonresident majority controlled every action because decisions required at least two of the three trustees.

Florida trust beneficiaries

A current income right did not by itself create the taxable beneficial interest. The Department also looked for unilateral rights over revocation, principal, or successor beneficiaries.

Accountants and tax professionals

Monitor trustee changes. A vacancy, replacement, residence change, or altered voting rule could change both trust situs and the beneficiary analysis that supported this ruling.

Common questions

Q: Did the trust have Florida taxable situs? A: No. Two of its three equal co-trustees were nonresidents, and every action required majority approval.

Q: Did the Florida beneficiary receive all trust income? A: Yes.

Q: Could the beneficiary take trust principal on her own? A: No. Principal distributions were discretionary and required majority trustee approval.

Q: Could the beneficiary revoke the trust or appoint successor beneficiaries without limitation? A: No.

Q: Did the Florida beneficiary have to file intangible-tax returns for the trust assets? A: No for January 1, 1994 and later under the facts in the ruling.

Q: Can another trust rely on this TAA? A: Not automatically. The advisement states that it binds the Department only under the facts and circumstances described in the request, and trustee composition, authority, or later legal changes may produce a different result.

Citations and references

• Fla. Stat. §§ 199.032 and 199.175(1) — annual intangible tax and Florida taxable situs
• Fla. Stat. §§ 199.023(7) and 199.052(6) — taxable beneficial interests in foreign-situs trusts
• Fla. Admin. Code r. 12C-2.006(3) — situs rules for resident and nonresident co-trustees
• Fla. Admin. Code r. 12C-2.002(1)(c) — beneficiary rights that create a taxable interest
• Florida Department of Revenue v. Kissel, 281 So. 2d 58 (Fla. 3d DCA 1973)
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 96C2-126

Original ruling text

Nov 22, 1996

Re: TAA 96(C)2-126
XXX ("Trust")
Taxable Situs for Testamentary Trust
s. 199.023(7); s. 199.032; s. 199.175, F.S.

Dear :

This is in response to your letter of September 12, 1996, in which you requested a Technical Assistance Advisement regarding the tax situs and taxability of a testamentary trust and the taxability of the trust's sole beneficiary who is a Florida resident pursuant to Subsections 199.023(7) and 199.175(1), F.S.

FACTS

The decedent was a Florida resident who died on January 22, 1976. Pursuant to the terms of Article VI of the decedent's last will and testament, a trust was created for the benefit of the decedent's daughter. The validity, construction, and administration of the trust is governed by the Laws of Florida.

The original trustees were appointed by the decedent's will, and these trustees were three in number. The trust is required to have at least three (3) trustees acting at all times, and all decisions of the trustees require approval of the majority of the trustees before any actions can be taken by the trustees. No trustee has authority to take individual action on behalf of the trust or its income beneficiary. If the number of trustees qualified to act falls below three, the acting trustees of the trust are authorized to appoint additional trustees by filing written instruments in Circuit Court, Collier County, Florida.

Since June 15, 1993, the trust has had three trustees, two of which have been residents of the State of New York since at least August 1, 1993. One of these trustees is the daughter of the sole income beneficiary, and granddaughter of the decedent. The third trustee is the decedent's daughter, the sole income

beneficiary of the trust, who has been a Florida resident since becoming a trustee on January 1, 1993.

Pursuant to the terms of the trust, the decedent's daughter, who is the Florida resident trustee, is to receive all of the income of the trust during her lifetime. In addition, the trust principal may be invaded and distributed to the daughter; however, the trustees have complete discretion with respect to such principal invasions and, as previously stated, all such decisions require the approval of the majority of the trustees. Under the terms of the decedent's will, no trustee has authority to take individual action on the behalf of the trust or its income beneficiary, and any trustee must obtain the assent of at least one of the other trustees in order to achieve a majority of the trustees. See Section 10 of Article Eleven, and paragraph B of Article Fourteen of decedent's will.

QUESTIONS

1. Whether the testamentary trust has a taxable situs in
   Florida and whether the trustees maintain management and control of the trust assets by a person domiciled in Florida on January 1, 1994 and years thereafter?
2. Whether the sole income beneficiary of the testamentary
   trust, who is a Florida resident, has a beneficial interest in a foreign situs trust and is therefore responsible for returning the resident's equitable share of the trust's intangible personal property pursuant to Subsection 199.023(7), F.S.?

DISCUSSION AND ANALYSIS OF LAW

Section 199.032, F.S., states the following with respect to Florida intangible taxation:

An annual tax of 2 mills is hereby imposed on each dollar of just valuation of all intangible personal property which has a taxable situs in this state, except for notes and other obligations for the payment of money, other than bonds, which are secured by mortgage, deed of trust, or other lien upon real property situated in the state. This

tax shall be assessed and collected as provided in this chapter. (emphasis supplied)

Subsection 199.175(1), F.S., speaks to the taxable situs of intangible personal property, and provides that such property shall have a taxable situs in Florida when it is owned, managed, or controlled by any person domiciled in Florida on January 1 of the tax year. Paragraph 199.175(1)(a), F.S., states that the language "any person domiciled in this state" means any natural person who is a legal resident of this state, and "[a]ny person, including a trust, who has established a commercial domicile in this state." Paragraph 199.175(1)(b), F.S., provides that a business or other artificial entity acquires its commercial domicile in Florida "when it maintains its chief or principal office in this state where executive or management functions are performed or where the course of business operations is determined." Rule 12C-2.006(3), F.A.C., provides additional guidance in this area, and states:

(3) Trustees: The taxable situs of a trust shall be in Florida if the trustee's usual place of business where the books and records pertaining to the trust are kept is in Florida, or if the trustee has no principal place of business then taxable situs shall be determined as follows: (a) If a Florida resident is sole trustee of a foreign trust, the trust is deemed to have a taxable situs in Florida and the corpus is subject to tax.

(b) If there is more than one trustee, and all are Florida residents, only one return is to be filed. (c) When trustees are both residents and nonresidents and management and control of the trust is with the Florida trustee, then a return for the trust is to be filed by the Florida trustee. (d) When trustees are both residents and nonresidents, and management or control is with an out of state trustee, then no return is necessary by the Florida trustee. (e) When there are two trustees, one is a resident and one a nonresident and they share equally in management and control of the trust, the assessment of property shall be apportioned between them.

(f) When there are three or more trustees and they are residents and nonresidents and they share equally in the management and control, the trust has a taxable situs in this state if the majority of the trustees are residents of this state. In such a case only one return is to be filed for the trust. If the majority of the trustees are nonresidents the trust does not have a taxable situs in this state and no return is to be filed. (emphasis supplied)

Based on this rule, the domicile of trustees, the persons managing or controlling the trust assets, is where the majority of the trustees reside. If the majority of the trustees are nonresidents of Florida, then the management or control of the trust is conducted by persons or trustees which do not maintain their domicile within Florida. See Florida Department of Revenue v. Kissel, 281 So.2d 58 (3rd DCA, 1973). The testamentary trust in such a situation would not have a taxable situs in Florida.

With respect to the taxation of the sole income beneficiary, Subsection 199.052(6), F.S., states the following:

(6) Each Florida resident with a beneficial interest, as defined in s. 199.023(7), in a foreign-situs trust, that is, a trust with situs outside of this state, is primarily responsible for returning the resident's equitable share of the trust's intangible personal property and paying the annual tax on it. The trustee of a foreign trust may return and pay the tax on the equitable shares of all Florida residents having beneficial interests, in which case the residents need not return such property or pay such tax. (emphasis supplied)

A Florida resident with a "beneficial interest" in a "foreignsitus" trust is responsible for returning the resident's equitable share of the trust's intangible personal property. In this case, there is a Florida resident who is an income beneficiary in a foreign-situs trust. The question is whether this Florida resident also has a beneficial interest in the trust assets as such interest is defined in Subsection

199.023(7), F.S.

Subsection 199.023(7), F.S., states the following with regard to "beneficial interest" in a foreign trust:

(7) A resident has a "beneficial interest" in a foreign trust if the resident has a vested interest, even if subject to divestment, which includes at least a current right to income and either a power to revoke the trust or a general power of appointment, as defined in 26 U.S.C. s. 2041(b)(1). (emphasis supplied)

In this case, the sole income beneficiary is a Florida resident, but she does not have a taxable beneficial interest in the trust. According to Subsection 199.023(7), F.S., a Florida resident who has an income interest in the trust must also have either a power to revoke the trust or a general power of appointment over the trust assets. In this regard, Rule 12C2.002(1)(c), F.A.C., defines a taxable beneficial interest in a trust as the ownership of one or more property rights in the principal of a trust. The rule states that a taxable beneficial interest in a trust is "the current right to income coupled with: the right to invade the corpus of the trust; or the right to revoke the trust; or the right to appoint successor beneficiaries without limitation." In this case, the income beneficiary does not have a right to invade the corpus of the trust; or the right to revoke the trust; or the right to appoint successive beneficiaries without limitation. See paragraph C of Article VI of decedent's will. The trust principal may be invaded and distributed to the income beneficiary, who is also a trustee of the trust, during her lifetime. However, the trustees have complete discretion with respect to such principal invasions and all such decisions, like any decisions of the trust, require the approval of the majority of the trustees before any action can be taken by the trustees.

The trust is irrevocable. The trust principal may only be invaded for the benefit of the beneficiary in the discretion of and by the majority decision of the trustees. The beneficiary has not been granted a general power of appointment.

Even though the beneficiary is a trustee, any decision with respect to invading the principal of the trust or appointing successive beneficiaries could only be made by a majority decision of the trustees. See Section 10 of Article Eleven. However, we also note that the power of the subsequently appointed trustees, which would include the sole income beneficiary in this case, also would include the appointment of additional trustees if the number of trustees, due to death, illness, or resignation, fell below three. See paragraph B of Article XIV of decedent's will. Accordingly, there is the potential that through the appointing of subsequent trustees, the sole income beneficiary could invade the principal of the trust and/or appoint successive beneficiaries.

RESPONSES

1. Since January 1, 1994, the Trust does not have a taxable
   situs in the state of Florida since the intangible assets of the trust were neither managed or controlled by trustees having a domicile in Florida.
2. The sole income beneficiary of the Trust, is not subject to
   or required to file intangible tax returns for intangible assets held in such trust on or after January 1, 1994.

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 based 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,

Harry A. Baucom
Tax Law Specialist
Tax Policy and Dispute Resolution

HAB/hb
Control No: 26541
Enclosure