Wealthy individuals or couples who have reached maturity do not need to worry about raising their children or paying bills. Money gives them the financial freedom, economic stability and peace of mind to do what they want. As estate (death) taxes rise, wealthy individuals wonder if it is financially beneficial to move to a more asset-friendly state to protect their assets.
Many “snowbirds” have vacationed in the warm weather states of Florida or Texas, so it is not a dramatic “leap of faith” for them to consider moving to these low-tax states permanently to protect their assets. But are the financial benefits in a more tax-friendly state attractive enough to justify the costs, expenses and hassles of moving? Here is an answer to this very important question.
Disadvantages of Moving to Low-Tax State
When you have lived your entire life in one state, you build up emotional, spiritual and social ties. Your core family may be concentrated in one area, but most Americans are very mobile. You might have good friends in your home state or you might have grown comfortable with the convenience of your home area. You also wonder about the costs of moving.
Many low-tax states have vibrant communities of people who have moved from high-tax states. So if people are socially-friendly and charismatic, they can make new friends. The Internet has made it easier to communicate over long distances, so your family will be electronically close. If you compare the money that can be saved by avoiding a high estate tax to moving costs, it might make sense to move financially.
Governments with High Debts Must Increase Taxes
With government debts rising, the primary way they can balance their budgets is to increase tax rates. The estate (death) and inheritance taxes are popular ways to generate revenue by transferring a portion of the wealth from private families to the public coffers. The government has been modifying the level at which the tax is “triggered” and experimenting with different rate levels.
According to W. Rod Stern, attorney-at-law, Entrepreneur Magazine’s Legal Guide Estate Planning, Wills and Trusts affect an estimated 1 to 2% of American household estates are large enough to incur the estate tax. Most states have what is called an “exemption” for the primary family home. The first step is to compare the value of your estate to that minimum threshold.
Some states realize that if they raise the estate tax exemption, they can attract wealthy individuals. These figures are always changing, but here is a sample of state estate tax exemption levels for 2012:
2013 State Estate Tax and Inheritance Tax Chart
|State||Type of Death Tax||2013 Exemption||2013 Top Tax Rate|
|District of Columbia||Estate Tax||$1,000,000||16%|
|Kentucky||Inheritance Tax||Up to $1,000||16%|
|Maryland||Estate Tax, Inheritance Tax||$1,000,000, $0||16%, 10%|
|Nebraska||Inheritance Tax||Up to $40,000||18%|
|New Jersey||Estate Tax, Inheritance Tax||$675,000, Up to $25,000||16%, 16%|
|New York||Estate Tax||$1,000,000||16%|
|Rhode Island||Estate Tax||$910,725||16%|
If your estate is valued above one of these limits, it makes sense to move to a state that puts you below their estate tax exemption rate. If you time the housing market properly, the sale of your old home could pay for the moving costs to the low-tax state. States know the value of wealthy residents and are offering plenty of financial incentives to encourage you to move.
How do Estate Taxes Vary by State?
Once the estate is valued above the exemption limit, then each state has a different rate that they charge for the death tax. Also in the chart above are figures for estate tax rates in 2013 (these changing very frequently). You should also take into account the rates because they can make a huge difference.
For example, if you calculate the difference between 9.5% and 19% estate tax rates, the amounts are quite dramatic. When you consider probate, estate (death) and inheritance taxes, it makes sense to move to a more asset-friendly state. If you explain to your children (future heirs) that they will inherit more money in a low-tax state, then they may support the move, especially with the ability to communicate.
While the primary reason for moving to a state with lower estate taxes is financial, there is also a philosophical difference in low-tax states. While colder high-tax states try to siphon off the wealth built up by hard-working citizens, the warmer low-tax states emphasize increasing the “productivity” of the state. This can create a better environment in the long run. You should consider moving to avoid state estate taxes if it is financially advantageous to do so.
Another option exists to avoid estate taxes in your own state. UltraTrust.com has many articles on the advantages of the irrevocable trust and how it can save you and your children from having to pay any estate taxes or even having to go through probate.