The problem, in the Legislature’s own words
Some trusts are drafted so that the person who created them remains taxable on the trust’s income, even though the income belongs to the trust. That is deliberate and it has advantages, but it produces an uncomfortable result. The staff analysis prepared when this section was amended puts it plainly.
A grantor must report all of the grantor trust’s income, losses, deductions, and credits on his or her individual income tax return and must pay any taxes on the grantor trust’s income even if the grantor has no beneficial interest in the trust.
Florida House of Representatives Staff Analysis, CS/HB 1001 (2022).
The obvious fix has costs of its own.
Where a grantor is unable or unwilling to bear the grantor trust’s income tax burden, the trust may be converted into a non-grantor trust so that the trust or its beneficiaries bear the tax burden. However, a conversion is not always desirable, as the conversion may make the trust ineligible to own stock in an S corporation or to qualify for a federal capital gains tax exclusion on the sale of the grantor’s primary residence.
Florida House of Representatives Staff Analysis, CS/HB 1001 (2022).
This section supplies a third option. Leave the trust as it is and let the trustee pay the tax.
What the trustee may do
Where all or part of the trust is treated as owned by a person under section 671 of the Internal Revenue Code, the trustee may, in the trustee’s sole discretion, reimburse that person for the personal income tax liability attributable to the trust’s income, capital gains, deductions or credits.
Two features are worth isolating. The amount is determined without regard to any other distribution or payment made from trust assets, so a reimbursement does not count against what the person otherwise receives. And the trustee may pay it to the person directly or to the appropriate taxing authority.
The discretion is real. Nothing obliges a trustee to reimburse, and a beneficiary objecting to a reimbursement is objecting to an exercise of discretion rather than to a breach of a rule.
On by default, and the opt out is a one way door
Subsection (2) applies the section to all trusts governed by Florida law or with a principal place of administration in Florida, whether created on, before, or after July 1, 2020.
That last part is the significant one. A trust drafted in 1998 has this power, without amendment and without anyone electing into it.
The way out is deliberately awkward.
The trustee provides written notification that the trustee intends to irrevocably elect out of the application of this section, at least 60 days before the effective date of such election, to the person treated as the owner of all or a portion of the trust under s. 671 of the Internal Revenue Code or any similar federal, state, or other tax law and to all persons who have the ability to remove and replace the trustee.
Section 736.08145(2)(a), Florida Statutes.
Irrevocably, on 60 days’ written notice, to two groups, the deemed owner and everyone with power to remove and replace the trustee.
That second group is the interesting choice. The people who can fire the trustee are told in advance that the trustee proposes to give up a power that benefits the grantor, and they have 60 days in which to do something about it. The Legislature did not make the election reviewable; it made it visible to the people who could respond.
There is a second exception in (2)(b). The section does not apply where applying it would prevent or reduce a federal tax benefit, and four are named, including the annual exclusion, the marital deduction, the charitable deduction and direct skip treatment. That is a savings clause, not an opt out, and it operates automatically.
Who is disqualified from exercising it
Subsection (3) prevents the obvious abuses. A trustee may not exercise, or participate in the exercise of, this power where the trustee falls into one of three categories.
- The deemed owner of all or part of the trust. Otherwise the trustee would be voting themselves a payment.
- A beneficiary of the trust.
- A related or subordinate party as defined in section 672(c) of the Internal Revenue Code, in relation to the deemed owner or a beneficiary.
The third is drawn in federal tax vocabulary and is wider than it sounds, reaching spouses, certain relatives, employees and subordinates. In a family trust it will often be the ordinary choice of trustee who is disqualified, which makes the answer to whether the power exists depend on who holds the office.
Subsection (4) then closes the gap. Where the trust requires the trustee to act on the direction or with the consent of a trust advisor or protector, the power is granted to that person instead or as well, and subsection (3) applies to them as if they were a trustee. That is a direct connection to the machinery in Part XIV, and this section anticipated it by a year.
The subsection with the longest reach
A person may not be considered a beneficiary of a trust solely by reason of the application of this section, including for purposes of determining the elective estate.
Section 736.08145(5), Florida Statutes.
Without this, an argument was available that a grantor whose taxes the trust might reimburse holds something like a beneficial interest, which could pull the trust into the elective estate and expose it to a surviving spouse’s elective share.
The subsection forecloses it, and the words including for purposes of determining the elective estate are express rather than left to implication.
It is worth noting that this is now the second place in chapter 736 where something is carved out of the elective estate. The other is section 736.1507, which excludes a deceased spouse’s half of a community property trust. Both were added in the 2020s, and both reduce what a surviving spouse can claim.
The life insurance rule
Paragraph (1)(b) is short and absolute. A life insurance policy held in the trust, its cash value, or the proceeds of any loan secured by an interest in it, may not be used for reimbursement if the person being reimbursed is an insured.
The reason is that using a policy on your own life to pay your own tax bill would create exactly the kind of incident of ownership that life insurance trusts exist to avoid. Read it with section 736.0902, which removes several prudent investor duties for life insurance held in trust. Between them, the two sections mark out how carefully Florida treats an insurance trust.
What the Legislature said it was for
The 2022 amendment narrowed the section to trusts governed by Florida law or administered here. The staff analysis explains the change, and then says something about the purpose that is unusual to see in print.
The bill may have a positive indeterminate fiscal impact on state government by attracting additional trusts to Florida and helping to retain trust assets and related business. This may result in an increased number of trusts and related business subject to taxation in this state.
Florida House of Representatives Staff Analysis, CS/HB 1001 (2022), fiscal impact section.
That is the fiscal note stating plainly that the object is to attract trust business to Florida. Anyone reading chapter 736 as a whole will have suspected as much, because the same instinct is visible in section 736.1403(2), where a single Florida trust director can fix a directed trust’s place of administration, and in section 736.1503(2), where one Florida qualified trustee is the whole connection required for a community property trust. This is the first place we have found it said out loud.
No court has construed this section
Our review found no citing decision, with a Florida court filter and nationwide, at every precedential status.
The section is six years old and its subject is tax administration rather than dispute. The questions that would reach a court are visible though. One is whether a trustee’s refusal to reimburse is reviewable as an abuse of discretion, and another is what happens if a disqualified trustee under subsection (3) reimburses anyway.