Would you relocate to save money?
September 8, 2014
by Brian Wolf

I recently found a great report on the best states, to retire in, and with the authors permission, I thought I would share that information with you. The study is very complex so I've condensed it down to the basics. If you want to read the entire study, it can be found at http://www.bdfllc.com/news-insights/best-states-to-retire/

When it comes to retirement tax planning, heading west or to Key West may be the way to go. Although Minnesota has many benefits, our tax system can be, pardon the pun; very taxing.

With state taxes being the new focus in estate planning given the new, higher federal estate tax exemption, everyone is subject to the same federal rules, but the tax system in each of the 50 states and Washington DC is different. New federal taxes on investment; income and capital gains will materially affect retirement income and the transfer of wealth and state taxes, which vary widely from state-to-state, will have the same consequence.

The purpose of this article is to present a compilation of state tax data and the authors' conclusion on the best states to retire in from a tax perspective. Together, the data and analyses should help readers conclude which states are among those that represent the lowest cost to a family's wealth. There are many factors to consider when deciding where to retire, and state taxes are among the most important for high net worth families who desire to maximize wealth transfers to future generations.

Many factors go into the decision of where to live for those who desire to change domiciles in retirement. The location of other family members, cost of living, familiarity of surroundings, and weather all play a critical role in deciding where to live. For some, taxes and the efficient transfer of wealth play a critical role in the decision-making process. With state estate tax rates as high as 19 percent, and income tax rates above 8 percent in many jurisdictions, the state tax bite represents a significant impediment to the preservation of family wealth.

The Best States to Retire in From a Tax Perspective Executive Summary states taxes are critically important in deciding where to retire. The states with the best overall tax environments for high income and high net worth retirees are Alaska, Florida, Nevada, South Dakota, Texas, and Wyoming. These states do not levy income, estate, inheritance or gift taxes, and stack up well in most other tax categories, except for Nevada (high sales taxes) and Texas (high real estate taxes). Other states also have favorable tax systems, but not in each tax category like the six noted above.

Each retiree's situation is unique, and a satisfactory tax outcome may result in states other than the six most favorable ones. For example, if a retiree has a lot of interest and dividend income, then Washington may be a good state to retire in if a married couple has less than $4 million in total assets, since it has no state income tax. Retirees with a lot of IRA and tax-qualified plan income should consider Alaska, Florida, Nevada, New Hampshire, South Dakota, Texas, and Wyoming, which do not tax such income, and levy no estate tax. Since Illinois, Pennsylvania, Washington do not impose income taxes on such income, they may also be favorable domiciles, unless the estate or inheritance tax they impose applies. Since almost all states do not have a gift tax, transferring wealth during life via gift is an important strategy.

Lifetime transfers to non-spouse recipients is more efficient, since no state tax is due on the transfer unless the donor lives in Minnesota or Connecticut. Transfers during life are tax-exclusive, meaning the recipient receives the full amount of the gift and the transferor pays the gift tax. Transfers at death generally carry the tax burden along with the transferred asset, i.e. they are tax-inclusive.

If estate taxes and inheritance taxes are a concern when planning the transfer of wealth, then pay close attention to the 20 states that levy such taxes. The states with extremely low exemptions include Maryland, Massachusetts, Minnesota, New Jersey, New York, Oregon, Rhode Island, and Washington DC, making planning even more challenging for high net worth retirees.

There are strategies that permit some state residents to have wealth taxed in another, more favorable jurisdiction. For example, IRS Private Letter Ruling 200944002 provides that a person can create an irrevocable, spendthrift Alaska trust, be its discretionary beneficiary, and have the trust assets excluded from the grantor's estate for estate tax purposes. Also, changing residency long before the sale of a business could result in significant tax savings.

The tax systems of the states are very different. A retiree's type and amount of assets can generate widely different results in different states. If state taxes are a priority to a retiree, he or she must closely examine the type and amount of assets and determine which state provides the best overall tax result.

So, are you ready to pack up "the old station wagon" and move yet? Obviously, there are many factors in deciding where you want to finish out your life, and money might not even be a factor, but it's kind of nice to know that, generally speaking, Minnesota is right in the middle of the pack as far as taxes are concerned.

If you would like to learn more about your specific estate planning and tax concerns, please give our office a call and we would be happy to help answer all, your questions.

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