A generous gift and estate tax exemption means only a small percentage of families are currently subject to federal estate taxes. But it’s 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 out of state isn’t 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 doesn’t necessarily mean you’ve escaped taxation by the state you left. Unless you’ve cut all ties with your former state, there’s a risk that the state will claim you’re still a resident and are subject to its estate tax.

Even if you’ve 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). And don’t assume that your estate won’t 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’re 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 and 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.

© 2021 Covenant CPA

People who live in states with high income taxes sometimes relocate to a state with a more favorable tax climate. A similar strategy can be available for trusts. If a trust is subject to high state income taxes, you may be able to change its residence — or “situs” — to a state with low or no income taxes.

What can a “trust-friendly” state offer?

In addition to offering low (or no) tax on trust income, some states:

  • Authorize domestic asset protection trusts, which provide added protection against creditors’ claims,
  • Permit silent trusts, under which beneficiaries need not be notified of their interests,
  • Allow perpetual trusts, enabling grantors to establish “dynasty” trusts that benefit many generations to come,
  • Have directed trust statutes, which make it possible to appoint an advisor or committee to direct the trustee with regard to certain matters, or
  • Offer greater flexibility to draft trust provisions that delineate the trustee’s powers and duties.

If another state’s laws would be more favorable than your own state’s, you might benefit from moving a trust to that state — or setting up a new trust there.

Take states’ laws into consideration

It’s important to review both states’ laws for determining a trust’s “residence” for tax and other purposes. Typically, states make this determination based on factors such as:

  • The grantor’s home state,
  • The location of the trust’s assets,
  • The state where the trust is administered (that is, where the trustees reside or the trust’s records are kept), and
  • The states where the trust’s beneficiaries reside.

Keep in mind that some states tax income derived from in-state sources even if earned by an out-of-state trust.

Making the right move

To enjoy the advantages of a trust-friendly state, establish the trust in that state and take steps to ensure that your choice of residence is respected (such as naming a trustee in the state and keeping the trust’s assets and records there). It may also be possible to move an existing trust from one state to another.

We can assist you in determining if setting up trusts in another state would help you achieve your estate planning goals. Contact us at 205-345-9898 or info@covenantcpa.com.

© 2019 CovenantCPA