With the gift and estate tax exemption amount at $12.92 million for 2023, only a small percentage of families are subject to federal estate tax. While that’s certainly a relief, state estate tax also must be considered in estate planning.
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. You may be considering retiring to a state with no (or a lower) state estate tax. However, doing so may not net the result you’re after.
Severing ties with your former state
Moving to a tax-friendly state doesn’t necessarily mean you’ve escaped taxation by the state you left. Unless you’ve sufficiently cut ties with your former state, there’s a risk that the state will claim you’re still a resident and subject to its estate tax.
Even if you’ve successfully established residency in a new state, you may be subject to estate tax 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 tax is triggered when the value of your worldwide assets exceeds the exemption amount.
Taking steps to establish residency
If you’re relocating to a state with low or no estate tax, consult your estate planning advisor about the steps you can take to terminate residency in your old state and establish residency in the new one. Examples include acquiring a home 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 the 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.
The bottom line
Before putting up the “For Sale” sign and moving to lower-tax pastures, consult with us. We can help you address your current and future states’ estate tax in your estate plan.