Moved South but Still Taxed Up North: Migrating to a Low-Tax State to Retire Doesn't Always Allow People to Escape Estate and Inheritance Taxes in the States They Left

By Opalka, Liz | Journal of Accountancy, August 2015 | Go to article overview

Moved South but Still Taxed Up North: Migrating to a Low-Tax State to Retire Doesn't Always Allow People to Escape Estate and Inheritance Taxes in the States They Left


Opalka, Liz, Journal of Accountancy


As 2014 drew to a close, Florida finally pulled ahead of New York to become the nations third most populous state, following California and Texas. But retirees and others from northern states who take up residence in Florida and other sunny, low-tax states should not be surprised when their former home states are reluctant to see them go as taxpayers.

State domicile typically arises in the context of not only state income taxes, but also state estate or inheritance taxes. Currently, 19 states and the District of Columbia impose estate or inheritance taxes, or both, in addition to the federal estate tax. These taxing authorities generally reach nonresident estates owning real estate or tangible personal property within their borders. Florida, Texas, and Nevada don't have income taxes or estate taxes.

For a retired snowbird, avoiding estate or inheritance taxes up north is not as simple as it would seem. Sometimes the individual didn't cut enough ties to the old state, so he or she is still considered a resident.

Individuals should be aware that they can be considered to be a resident in more than one state although they will be domiciled in only one state. Domicile is defined as a person's fixed or permanent abode that the person intends to remain in indefinitely and to which the person intends to return. Residency is a much more flexible term and may be defined differently depending on the state. For example, some states determine residency by looking at whether a person has a permanent place of abode in the state and lives in it a certain number of days in the year.

Just owning a vacant lot, other real property, or even tangible personal property located in another state can require a nonresident estate tax return to be filed, and the state exemption amount is often much lower than expected.

STATES WITH ESTATE TAXES

Estate taxes generally apply a graduated tax rate schedule to the taxable value of a decedent's total estate. Bequests to surviving spouses and charities are typically exempt from the tax, in addition to a dollar amount for exemption that applies to all other estate beneficiaries.

While the federal estate tax laws appear to have finally stabilized, state estate taxes continue to be in flux. For 2015, a number of states made significant changes to their estate tax rules. For example, Maryland, Minnesota, and New York increased their exemption amounts. Most states' exemption amounts are much lower than the federal estate tax exemption amount, which is inflation-adjusted and is $5.43 million for 2015 (see "State Estate Tax Exemption Amounts" for a complete list of estate tax thresholds around the country).

New Jersey has the lowest exemption, $675,000, but it also does not impose its estate tax on nonresidents, even if they hold real or personal property in the state. It does, however, impose its inheritance tax on real or personal property located in New Jersey that a nonresident transfers at death, but not on intangible property.

The filing requirement for a nonresident estate tax return in some states (including Connecticut and Maryland) generally kicks in when the value of the decedent's worldwide assets exceeds that state's exemption amount, not, as one might expect, when the value of the nonresident's assets located in the state exceeds the exemption amount. This means, for example, that the estate of a Florida widow with $2.4 million cash and a vacant parcel of land in Connecticut worth $100,000 will have to file a Connecticut estate tax return and pay the state about $1,000 in tax. But there's more bad news.

SEARCHING FOR RESIDENTS AMONG THE NONRESIDENT FILINGS

In an attempt to ensure that they are not missing out on property they could be taxing, various states require the estates of nonresident decedents to complete sometimes onerous paperwork. For example, a nonresident estate filing a Connecticut estate tax return must also complete a three-page questionnaire, Form C-3 UGE, State of Connecticut Domicile Declaration. …

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