The recent changes in the federal estate-tax law have highlighted state inheritance tax as another reason to move from high-tax states.
Just because you may be lucky to benefit from the increase in the federal exemption doesn't mean that your state of residence is going to give up on its share of your estate.
The so-called boomer generation is being squeezed by taxes and other governmental costs among a long litany of financial problems. For most of these problems, there is no easy solution. However, with careful planning for potential state death tax, it is possible to avoid most of the harsh results merely by moving to a friendlier and, perhaps sunnier, climate — a state that doesn't get hit with blizzards and has low tax and living costs.
With states being squeezed for tax revenue, there are some states — as unbelievable as it may seem — that are considering enacting an inheritance tax. As of now, there are 21 states and Washington, D.C., which have some form of estate or inheritance tax. Maryland has the distinction of having both.
Hawaii enacted an estate tax in 2010. But it doesn't seem to me that Hawaii is getting into the competition to market itself as a retirement center for the boomers. North Carolina, which does promotes itself as a desirable location for retirement living, does have an estate tax. But at least its state exemption from tax matches the federal exemption amount.
What is fascinating is that the states with significant state death taxes also tend to be the high-tax, high-cost states. New York, Massachusetts and New Jersey (along with other states in the Northeast and Midwest) all make it expensive to live and die there. These states have traditionally fueled the move by retirees — and others — to the Southeast and Southwest states.
Like everything else dealing with tax, it is complex and planning isn’t as straightforward as you would assume. While technically most states don't have a death tax, they do have what is known as the "pick-up" tax. That is, under the federal tax there is a credit given by the feds for taxes paid (or to be paid) to the state.
With using the "pick-up" tax subterfuge, the states actually do tax, but limit the tax to the amount that would equal the credit given under the federal estate-tax system. This way they plausibly claim that they don’t have a death tax when, in reality, they really do get a chunk of cash out of the estate.
Not to be overlooked is the fact that for state tax purposes, an estate can be taxed in several states. The U.S. Supreme Court as far back as 1939 (Texas V. Florida) determined that under some circumstances, different states can all legitimately claim to have jurisdiction over the assets in an estate.
What this means is that each state can assess and collect tax even if the total tax that has to be paid to the states would be more than the actual estate. It takes some sophisticated professional planning to make sure that state death tax planning is, in fact, done right.
Without question, as more boomers retire, they will be looking to cut costs and live in places which are, on many levels, enjoyable.
Battling snowstorms, higher taxes, and failing infrastructure isn’t going to be acceptable when there are reasonable alternatives.
The state inheritance tax problems merely highlights the desirability that boomers — and the suppliers of services to boomers — may all find in moving to sunnier climes.
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