A generous gift and estate tax exemption means only a small percentage of families are currently subject to federal estate taxes. However, it is important to consider state estate taxes as well. Although many states tie their exemption amounts to the federal exemption, several states have exemptions that are significantly lower — in some cases $1 million or less.
Moving is Not Necessarily the Answer
One way to avoid this tax burden is to retire in a state that imposes low or no estate taxes. But moving to a tax-friendly state does not necessarily mean you have escaped taxation by the state you left. Unless you have cut all ties with your former state, there is a risk that the state will claim you are still a resident and subject to its estate tax.
Even if you have successfully established residency in a new state, you may be subject to estate taxes on real estate or tangible personal property located in the old state (depending on that state’s tax laws). In addition, do not assume that your estate will not be taxed on this property merely because its value is less than the exemption amount. In some states, estate taxes are triggered when the value of your worldwide assets exceeds the exemption amount.
Establishing Residency in Your New State
If you are relocating to a state with low or no estate taxes, learn about the steps you can take to terminate residency in the old state and establish residency in the new one. Examples include acquiring a residence in the new state, obtaining a driver’s license, registering to vote there, receiving important documents at your new address, opening bank accounts in the new state and closing old ones, and moving cherished personal possessions to the new state.
If you own real estate in the old state, consider transferring it to a limited liability company or other entity. In some states, interests in these entities may be treated as nontaxable intangible property.
Before putting up the ‘for sale’ sign and moving to lower-tax pastures, consult with us about addressing your current and future states’ estate taxes in your estate plan.