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Five Planning Questions for Clients Before Moving

Many people now work from home – and some Northerners hope to keep doing so in Fla. But a move has tax implications, estate-planning impacts and a possible effect on trusts. Relocators should ask and answer five questions before committing to a state-to-state move.

NEW YORK – When the coronavirus broke out in early 2020, working from home became the new normal for many people. Suddenly it became possible to work remotely and live just about anywhere. At the same time, some city-dwellers started thinking about staying safe by moving to less densely populated areas such as the suburbs or their vacation homes. And some “snowbirds” who usually fly south for the winter decided to stay through the spring and longer.

There’s no question that Americans are on the move, which could change the nature of many cities and towns. It also poses financial and tax questions for those who are thinking of relocating. Here are five commonly asked questions from clients and their answers.

Saving money
Is there a simple way to determine if I’ll save money by moving to another state?

You’ll need to crunch the numbers to fully understand the potential costs and savings associated with relocating. This includes state and local income taxes, sales taxes, state-level estate or inheritance taxes and real property taxes. In addition, you need to ask yourself whether your cost of living, independent of taxes, will be lower or higher. Don’t forget to factor in the cost of travel for family visits or return visits to your old home.

It’s important to understand that each state’s tax rules are different, sometimes in subtle ways. You need to know both your numbers and the statutes to calculate the financial benefits of moving.

Multiple homes
If I own homes in more than one state, where would I pay income tax?

The answer to this question can get complicated. For example, someone could have a vacation home in Connecticut or New York but be domiciled in New Jersey.

The starting point in most cases is where you’re officially domiciled – that is, where do you consider your permanent home? You can only be domiciled in one state, and you are subject to income tax in that state. (And Florida has no income tax.)

To determine domicile, auditors look to primary factors such as where you have homes, where you do business, the amount of time you spend in various locations, where you keep your “near and dear” items, and where your family is located. No single factor is determinative so they’ll often look at secondary factors such as where your financial statements and bills are sent, where your car is registered and where you are registered to vote.

Once your domicile is determined, you need to look at the other states where you spend time and determine whether your connections to that state are sufficient to be subject to tax. Often, it’s a question of time spent in the state. For instance, if you’re domiciled in Connecticut but also have a permanent home in New York and you spend more than 183 days in New York per year, you’re considered a New York “statutory resident” and will be subject to state income taxes on all of your income.

Audits
Does owning homes in different states increase the odds of being audited by the states?

Owning a home in multiple states within itself may not increase the odds of being audited by a particular state. However, a change in your residency status in one of those states clearly may draw a state’s attention. In the final year of paying tax to a state that has an income tax, you’ll file a part-year resident return. This can be a flag to that state that it’s losing a taxpayer along with revenue.

You’ll be required to declare which date you moved out of that state. That seems simple but not always. Determining the date when you changed your domicile will be a starting point in the audit process. If you’ve had a vacation home in Florida and file a final year income tax return in New York, you need to determine when you changed your domicile if you retain your New York house. Expect to explain the timing to New York if there’s an audit. The value and size of both homes will be questioned. This may be easier to explain if you retired and no longer need to be in New York to work.

The time to prepare for an audit is before you file your last tax return in that state. You will be asked to share cell phone records, credit card bills, travel bills and EZ pass records. And perhaps most of all, moving expense records. When most people move, they literally need to move. If you aren’t packing up your possessions and sending them someplace else, you’ll be asked by an auditor how it is that you changed your domicile.

Estate-planning issues
What estate planning issues should I consider before moving to another state?

In 2021, the 40% federal gift and estate tax will apply to estates valued at more than $11.7 million for individuals and $23.4 million for married couples. So, if a husband and wife with assets of less than $23.4 million both died in 2021, their estate wouldn’t be subject to the federal gift and estate tax.

But if you’re thinking about moving to another state, keep in mind that 12 states and the District of Columbia impose their own separate estate tax in addition to the federal estate tax. Six states have an inheritance tax. Maryland is the only state to impose both.

There also could be implications if you move and the executor or trustee you’ve named in your estate plan now lives in another state. And, if you don’t move but your executor or trustee does, there could be implications. Be sure your executor or trustee meets the qualifications of your new home state and it’s still practical for them to serve.

Out-of-state executors may need to post a bond. It also can be more time-consuming and expensive for someone who lives out of state to deal with all the details and logistics of sorting through tangible personal property or the sale of a home. Finally, your location or the location of your trustees might impact the trust’s state income taxation. It might be more convenient to appoint a corporate executor or trustee.

Taxation of trust
Will my trust be taxed any differently if I move to another state?

Trust income taxes are based on a hodgepodge of different factors in different states. Depending on the state, the trust’s income tax might be based on the domicile of the individual who created the trust, the state where the current or remainder beneficiaries live, the state where the trustee lives, the state where the trust is administered or even the state where the trust assets are managed. In addition, some states tax a testamentary trust but not an identical trust created during an individual’s lifetime.

Also keep in mind that if a trustee or beneficiary of a trust moves, there may be state income tax implications for the trust. If this happens, consider changing trustees or segregating trusts with multiple beneficiaries.

If you’re thinking about creating an irrevocable trust, either to capture the record-high federal estate tax exclusions or for any other reason, think about whether you want to create your trust before you move or after you move. Carefully examine state trust laws and taxes. If you’re moving from New York to Florida, for example, you might want to wait until after you move.

This article was based on an article in Fiduciary Trust International’s Perspective e-newsletter.

© 2021 Penton Media