When people move from state to state, financial, tax, legal, and people issues should be considered. Otherwise, a move that produces certain benefits could create unanticipated costs.
People move from state to state for a variety of reasons. In their youth, they may move to attend college. During their prime working years, they may move to change jobs. In retirement, they may move for non-financial, or people, reasons such as weather conditions. After nine feet of snow this past winter in Boston, Florida looks even more attractive.
Financial planning involves a coordinated discussion of the financial, tax, and legal issues, such as:
Cost of living
There are also people issues, such as:
Quality of medical and custodial care
Proximity to friends and family
Access to favorite activities
Here are some recent examples of clients or parents of clients whose move from state to state created opportunities as well as problem.
First Example: One client’s mother died at 65. Her estate carved out the then $600,000 unified credit amount and funded a family trust for the benefit of her surviving husband, my client’s father. The cost basis of those assets today is the same $600,000 due to a step-up in cost basis to the fair market value at her death.
After father retired, he moved from Massachusetts to Virginia to be closer to another child. Now, father is 92. The value of mother’s trust has grown to $1.5 million, but it still has the same $600,000 cost basis. These assets are not included in father’s taxable estate, but as a result do not benefit from a second step-up in cost basis at his death.
Massachusetts has an estate tax on estates over $1 million measured by the Federal credit for state death taxes. Virginia does not have an estate tax. Even if we combined father’s estate assets with mother’s trust, father’s estate would be under the current $5.43 million federal estate tax exemption.
Therefore, there will be no federal or state estate taxes upon his death. But, his children, my client and his sister, will likely sell the assets in their mother’s family trust upon their father’s death. The children will incur a capital gain on $900,000. Assuming a combined federal and state capital gain rate of 20 percent, they will lose $180,000 to capital gains taxes.
So, we recommended that the deceased wife’s family trust distribute its principal to the surviving husband. That’s right. We are recommending that we increase father’s taxable estate. Why? So, we can get a second step-up in cost basis.
Even if they still live in a state that has an estate tax, you should calculate the estate tax vs. the capital gains tax. For example, let’s assume that adding the family trust to father’s estate would increase his estate from $1.5 million to $3 million.
In Massachusetts, the estate tax on $1.5 million is $64,400 compared with the estate tax on $3 million, which is $182,000. Paying $117,600 more state estate taxes saves $180,000 of federal and state capital gains taxes.
If father’s estate increased to $3.65 million then his Massachusetts estate tax would be $244,000, which increases his estate tax by $179,600 to save $180,000 in capital gains. Beyond that, adding to his taxable estate would create state estate taxes in excess of the federal and state capital gains tax savings.