It is no secret that states have different tax regimes. So why not use them to your advantage, especially if you are married? Spouses already living in different states, or married couples interested in moving, could benefit significantly from a creative estate plan. 

Essentially, there are high-tax states and low-tax states. Advantages and disadvantages apply depending on individual needs, circumstances and preferences. In pure financial terms, however, the lower the income and estate taxes the better. In California, for example, top income earners face a 13.3 percent state income tax. When combined with a top federal income tax rate of 37 percent, wealthy Californians are forking over half of their annual earnings to state and federal treasuries. 

Middle income earners are not exempt. Californians making $58,000 a year pay a 9.3 percent state income tax rate and New Jersey residents making $75,000 a year pay 6.4 percent. On the other hand, residents of Texas, Wyoming, Washington, Nevada, South Dakota, Alaska, and our own state of Florida pay nothing in state income taxes. Again, why not use these variances to your advantage?

While this is an estate planning strategy you will want to discuss with your attorney, let us share one way married couples can do so. For example, a spouse living in a high-tax state could gift intangible income-producing assets to his or her spouse living in a low-tax state. Intangible assets are not physical in nature like buildings or real estate, but include items such as patents, literary works, broadcast rights, computer software, and lease and franchise agreements. After a reasonable period of time, the low-tax spouse can contribute these assets to a Qualified Terminable Interest Property trust, also known as a “QTIP” trust. Not only could the income then be taxed at the lower-tax rate, but the QTIP trust’s distributions can go back to the spouse living in the high-tax state where the intangible assets first came from.

A QTIP trust can also take advantage of the marital deduction which allows for married partners to transfer property between them without federal transfer taxes applying. They also provide for a surviving spouse, while protecting assets for future generations, and further allow flexibility for an estate’s personal representative to maximize tax savings after the estate grantor passes away. 

If you or someone you know would like more information about state-to-state tax savings, QTIP trusts and creative estate planning solutions, do not wait to contact our law practice. We understand these issues and look forward to speaking with you.