This blog has information for both Minnesota and Florida residents. We will start with Minnesota. Florida information follows below.
MINNESOTA- PTE Tax
In 2021, the Minnesota legislature enacted a new law aimed at reducing tax for Minnesota taxpayers hurt by the “SALT cap.” The new law went into effect in 2021, but many Minnesota business owners are unaware of this tax minimization opportunity.
One of the most contentious provisions in the Tax Cuts and Jobs Act of 2017 was the $10,000 cap placed on the federal tax deduction for state and local taxes paid. If a taxpayer paid over $10,000 in state and local taxes, including property taxes, the taxpayer could only deduct $10,000 of that amount from federal income taxes. In other words, the SALT limitation prevented business owners who itemized from receiving a tax deduction for the payment of over $10,000 in state income tax on their business income. The so-called “SALT cap” was reportedly a punishment for states like Minnesota that tend to vote Democratic and generally impose higher state and local taxes on state taxpayers. So far, Congress has failed to repeal this provision. The “blue states,” whose citizens were most dramatically affected by the SALT cap, have been forced to devise solutions for their voters.
The $10,000 SALT cap does not apply to business entities. Minnesota lawmakers enacted legislation allowing a “pass through entity,” such as a partnership, a multi-member limited liability company, or an S corporation, to pay income tax at the entity level on behalf of partners, members, or shareholders. The owners may claim a refundable credit equal to the tax paid by the pass-through entity on their behalf.
Qualified business entities may elect to pay this Pass-Through Entity (PTE) tax if the owners who collectively control more than fifty percent (50%) of the entity make the election, which is binding on all owners. The PTE tax is calculated by multiplying the entity’s Minnesota source income by the highest Minnesota individual income tax rate, which is currently 9.85%. At least one owner must be eligible to make the PTE election. A qualifying owner must be a resident or non-resident individual, estate, or grantor trust that is a partner, member, or shareholder of a qualifying entity. A qualified grantor trust must be both a disregarded entity and owned by an individual U.S. citizen in order to qualify. Partners, members, and shareholders are required to file certain forms with the Minnesota Department of Revenue. The company must pay quarterly taxes based on estimated PTE tax liability. Non-residents are subject to additional restrictions in order to qualify.
Talk to your CPA or tax attorney about how to take advantage of this PTE tax.
FLORIDA- RESTRICTIONS ON DEVISE AND DESCENT OF HOMESTEAD
If you own your home and it is your primary residence, it is likely your “homestead.” Not only do you receive a homestead tax exemption, but your homestead enjoys protection from forced sale by most creditors (there are exceptions for the IRS, the SEC, and other “super creditors”). Many Floridians fail to understand, however, that the Florida Constitution and statutes impose significant restrictions on your ability to leave (“devise”) your homestead to anyone other than your spouse and children when you die.
That means that if you are a homestead owner who remarries, your spouse will have automatic rights to your home.
Dying Without a Will or Trust
If you die without a will (“intestate”), leaving a spouse and children, your surviving spouse is entitled to a “life estate” in your homestead (meaning that the surviving spouse has the right to continue to live at your homestead for his or her remaining life), after which the homestead will pass to your living descendants (children). Alternatively, the surviving spouse can elect to become a 50% owner of the homestead, with your children being the other 50% owners. If your surviving spouse has a life estate, he or she cannot sell the homestead or leave it to anyone other than your children. This law of “intestate succession” of the homestead applies even if your children are not minors.
In a blended marriage, if you have a second spouse, and die without a will or trust in place, the children of the first marriage will have a right to the homestead after the death of your second spouse or, if he or she elects the 50/50 ownership, they will co-own the homestead property equally with the second spouse.
Dying With a Will or Revocable Trust
If you do not follow the rules when you try to leave your homestead via will or trust, the devise will fail, and the homestead will pass as if you did not have a will, in the manner described above for an “intestate” situation.
When you devise your homestead in your will or revocable trust, you cannot bypass your spouse and minor children. Let’s say you die, leaving a surviving spouse and minor children. In your will, you leave your homestead to your best friend. That devise will fail, and the law will treat your homestead as if you had died without a will. You may only devise your homestead to your spouse for life, and then to your children. If your surviving spouse elects to do so within a certain time limit (six months), he or she may elect to own the homestead 50/50 with the children; the spouse will have no right of survivorship in the homestead, nor will the children.
What IS Permitted?
By negative inference, homestead property is freely devisable if there is no surviving spouse and no minor child. In other words, if you are unmarried (or widowed), and you have no minor children, you can devise your homestead as your wish, by will or trust.
If there are no minor children, but you have a spouse, you may devise your homestead, by will or trust, to your surviving spouse.
As long as you have no surviving spouse and no minor children, you can transfer your homestead during your lifetime, bypassing your adult children. For example, if you are the surviving spouse and own the homestead, as long as you are unmarried and have no minor children, you can transfer the home to your grandchildren, bypassing your adult children, or you can devise your homestead to a revocable living trust with your grandchildren as the beneficiaries.
During your lifetime, as long as you have no spouse or minor children, you can execute a deed transferring the homestead to yourself for life, then to your grandchildren.
While you are alive, you can transfer your homestead to an irrevocable trust, meaning you cannot revoke (“take back”) the transfer of the property. You can retain a “life estate” in the property, as long as you do not have the power to take back the property for yourself during your lifetime. You should have an attorney assist you if you choose this option, as there are many traps for the unwary.
Florida Statute 732.7025 states that a spouse can waive his or her rights to the homestead if he or she joins in the transfer to someone else, provided that certain specific language is included on the deed. However, a 2019 case from Alachua County, Williams v. Person, has rendered this statute doubtful as to its effectiveness. The only sure way for your spouse to waive his or her homestead rights is through a solid prenuptial or postnuptial agreement.
If you and your spouse own your home as “tenants by the entireties,” this will overcome the restrictions on devise and descent of the homestead. However, in second or third marriages, the spouses may not want to re-title their homestead into joint names with the new spouse. Without a prenuptial or postnuptial agreement in place, the devise restrictions discussed above would apply, so you should consult with an estate planning attorney to ensure that your homestead passes upon your death in the manner you intend.
Note that you should read the small print on your mortgage and promissory note documents. It is possible to accidentally waive your homestead rights by agreeing to the terms of some of these contracts.
If you have questions about the Florida restrictions on devise and descent of homestead, talk to your estate planning attorney.
Natalie A. Roberts
THIS ARTICLE IS PROVIDED FOR GENERAL INFORMATION PURPOSES ONLY AND SHOULD NOT BE CONSIDERED LEGAL ADVICE OR RELIED UPON AS COMPLIANCE, LEGAL, OR TAX ADVICE. LEGAL ADVICE IS NOT PROVIDED IN THE ABSENCE OF AN ENGAGEMENT AGREEMENT FOR A SPECIFIC MATTER AND THE EXISTENCE OF AN ATTORNEY-CLIENT RELATIONSHIP BETWEEN YOU AND FLAGSHIP LAW. LEGAL ADVICE WILL ALWAYS DEPEND UPON YOUR SPECIFIC SITUATION.