How To Get State Death Tax Relief

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Do you have to pay both federal estate taxes and state estate/inheritance taxes (also referred to as death taxes)? Reynolds Group, Private Investment Counselors shows how you can gain attractive death tax relief regardless of the state in which you live.

The term 'death tax' is a colloquialism used by non-professionals to refer to estate, inheritance and gift taxes. Paying death taxes at both the federal and state level can be quite substantial, especially if you are a married couple. Say for example, you are a married couple living in New Jersey with a $10 million estate. You may have to pay a $1.5 million estate tax and your heirs have to pay a $1.6 million inheritance tax. How can you gain attractive death tax relief regardless of the state in which you live?

How to Avoid Death Duties in High Tax States

About one third of the U.S. population resides in the 19 states/D.C. that have estate and/or inheritance taxes. Currently, the federal government offers a relatively generous gift and estate tax exemption of $5+ million per person, or $10.5+ million per couple. The two thirds of the population that live in the 31 states without these tax burdens, are sometimes referred to as living in tax haven states. (In order to qualify as a resident of a tax haven state, you must live there at least six months a year - consult your adviser for specifics.)

If you reside in a state that has death taxes then you might consider one of the options below:

  • 1) Move. Do you like snowy winters? Then consider moving to New Hampshire, Michigan, Wisconsin, the Dakotas, Montana, Idaho or Alaska, which have no state estate or inheritance taxes. On the other hand, if you are a sunbird, then the entire Sun Belt is open to you. From Virginia to Florida and from Florida to California (excluding Tennessee), these states have no death taxes either.
  • 2) Have Multiple Residences. If you are a part of a couple and one of you wants to move to a tax haven state while the other does not, this too can be arranged. A client has taken this approach and although it requires careful planning and good recordkeeping, it is not out of the question. Be aware that the estate of the person who continues to reside in the non-tax haven state will still be subject to that state’s death taxes.
  • 3) Become a Nomad. You might be wondering, “Hey Jack, instead of moving my residence to a low tax state, why don’t I just travel for six-plus months a year, or perhaps hike the Pacific Crest Trail?” Well you can certainly do that, but most states do not allow you to stop being a resident (and avoid their death taxes) until you become a bona fide resident of another state. The nomad strategy is unlikely to be successful, and each situation is fact-specific, so be sure to consult your advisers.

Two More Ways to Reduce Your State Death Taxes

  • Life Time Gifts: If you reside in a state with estate and/or inheritance taxes, is there anything that you can do to ameliorate your state death tax burden? Happily, the answer is: yes, by making lifetime gifts to your non-charitable beneficiaries. Unlike estate transfers, gifts made during the lifetime of the asset holder are not taxed at the state level upon transfer to the beneficiary (except in Connecticut and Minnesota). So be generous to your beneficiaries during your lifetime to reduce your death taxes (just be sure to keep enough to live on).
  • Manage Taxes on Non-Cash Gifts: As you have seen, transferring assets can affect death taxes on both the estate and beneficiary. Transfers can also affect income tax considerations, especially for non-cash gifts. For example, if you transfer a non-cash gift that has appreciated (e.g., securities, business interests or property), then your beneficiary may have to pay a significant capital gains tax if and when they sell it. Fortunately, the capital gains tax problem can be reduced through careful planning and analysis of the tradeoffs between death-related taxes and capital gains tax. Consult your advisers, since as each situation is fact-set-specific.

Recommended Reading to Learn More

You may wish to find out more about the topics I have addressed above and a table of estate and inheritance taxes, exemptions and top tax rates by state. If so, see "States You Shouldn’t Be Caught Dead In," by Laura Saunders, in The Wall Street Journal of October 26, 2013, at page B-7. It is most important that you is consult professionals who can assist you with financial and estate planning.

Questions about minimizing your death taxes? Please call 617.945.5157 or email jack(at)rgpic(dot)com. Our complete disclaimer appears here http://bit.ly/1Gnzbwy.

About Us
Reynolds Group, Private Investment Counselors was established in 2010 to help clients manage and resolve the complex investment, asset protection and legacy planning needs that comes with having significant investment resources. John M. (Jack) Reynolds, the firm’s founder, has over 25 years of investment experience growing and protecting financial and non-financial assets for individuals, family offices, endowments and professional services firms in the United States and Europe.

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Jack Reynolds

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