Have You Taken State Estate Taxes into Account?

T&E Chat

02.12.18 | T&E Chat

The Tax Cuts and Jobs Act has doubled the federal gift and estate tax exemption, with inflation-adjustments projected to raise it to $11.18 million for 2018. This means federal estate taxes are a concern for fewer families, at least in the short term. (The doubled exemption expires December 31, 2025.) But it’s important to consider how state estate or inheritance taxes may affect your estate plan.

There’s uncertainty about how states will respond to the increased federal estate tax exemption. One line of thought is that many states will continue to “decouple” from the federal exemption and impose their own estate tax exemptions at a lower amount.

Establishing Residency in a New State

If your estate is large enough that estate tax liability is a concern, one option is to move to a state that imposes low or no estate or inheritance 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 federal exemption amount. In some states, estate taxes are triggered when the value of your worldwide assets exceeds the state’s exemption amount.

Terminating Residency with a Previous State

If you’re considering relocating to a state with low or no estate taxes, consult with us about steps you can take to abandon your former state’s domicile and establish a new domicile in the low or no tax state. Some, but not all of the steps include acquiring a residence in the new state, moving cherished personal possessions to 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 the old ones..  Changing domicile is a very personal act, revolving around your lifestyle.  A mere checklist will not suit all and it is crucial to review your individual circumstances with an expert.

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. Contact us to learn more about how state estate or inheritance taxes may affect your estate plan. I can be reached at SDitman@BerdonLLP.com or contact to your Berdon advisor.

Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.