Back in the 1980s, I recall the New Yorker running a cartoon showing heaven including a brokerage office on a cloud with angels standing at a counter. The message was: “This is for the lucky few that managed to take it with them.” Fast forward to today: The tagline for the Showtime TV series Billions is “Leave them with nothing.” If nothing is certain except for death and taxes, what are the best and worst states for estate taxes? This is certainly an area where your client needs professional advice.
Now, to the state level: According to moneytips.com, 18 states have estate or inheritance taxes. Clients may want to know the difference: The former comes out of an estate, and the latter applies to heirs. This is an issue because the long arm of the law reaches them (and gets its share) even if the heirs live out of state. Six states have inheritance taxes: Moneytips.com lists them as Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania. Spouses are exempt.
Twelve states have their own estate taxes. (Inheritance taxes are in place in 6 additional states.) We are back to the moneytips.com research. A state’s estate tax rate might be high, but the threshold is an important consideration. After all, the federal government draws the line at $11.2 million.
District of Columbia
So, where’s the best place to die? Obviously, it would be a state with no estate or inheritance taxes. Everplans sums it up nicely. If, out of 51 possibilities, we subtract 18 states with estate or inheritance taxes (Maryland has both) and throw in the District of Columbia, we have 33 states with neither. They are: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Delaware, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Tennessee, Texas, Utah, Virginia, West Virginia, Wisconsin and Wyoming.
To take advantage, what clients need to do is establish residency. It’s like a shell game: People might like the bright lights of New York while desiring the lack of estate taxes in Florida. According to Frost PLLC, Public Accountants, most states want to see several things proving you really live in their state. Although it may vary by state, their site lists the following:
Keep a log of days spent where - Open bank accounts
Change mailing address - File resident and non-resident tax returns
Get a driver’s license, register your car - Buy or lease a residence
Register to vote - Change the address on documents
Yes, you want to check requirements by state. For example, Florida’srules include filing a declaration of domicile, getting a driver’s license and registering your vehicles, opening bank accounts, registering to vote, notifying tax officials, applying for the homestead exemption and updating your estate plan.
Dying as a Maryland resident is not a good idea. They have a 16 percent estate tax on estates valued above $5 million. Maryland also has an inheritance tax, which is levied against beneficiaries. Fortunately, this does not apply to surviving spouses and children of the deceased.
There’s also an interesting quirk in the rules: When you have a lot of money, you want everything possible working in your favor. The article on thebalance.com I cited earlier explains Hawaii allows portability of the estate tax exemption, meaning the unused portion of the $11.2 million threshold for the first spouse to die can transfer to the surviving spouse. Maryland, in recent legislation, allows for spousal portability on the unused portion of their $5,000,000 exemption.
So, what’s the bottom line? If your client’s spouse is inheriting, the question is academic. There’s usually a tax-free transfer between spouses. If your client has under a million, it’s not a big issue, unless they live in Rhode Island, where the threshold is $850,000. If your client is worth multiple millions, a state with no estate or inheritance tax is preferable. They’ve got lots of choices, but they need to establish residency, ticking all the boxes.
Bryce Sanders is president of Perceptive Business Solutions Inc. in New Hope, Pennsylvania. He provides high-net-worth client acquisition training for the financial services industry. His book, Captivating the Wealthy Investor, can be found on Amazon.com.