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Many retirees split their time between two states, enjoying the best of both worlds. While this lifestyle offers benefits, it can also complicate your financial and estate planning—especially regarding taxes. Snowbirds must understand how dual residency impacts estate taxes to avoid surprises and ensure their loved ones are financially secure. Here, we explore strategies snowbirds can use to protect their assets and minimize tax liabilities.
Understanding Dual Residency and Tax Implications
Being a snowbird means you’ll need to consider the tax laws of two states. Each state has tax rules, which can impact your income and estate. A major concern is which state will claim you as a resident for tax purposes and how that affects your estate.
- Establishing domicile–While you may spend time in two states, you can only have one domicile or primary residence. Your domicile is the state where you have the most significant connection—the place you consider your permanent home. This is important because your domicile determines which state can tax your estate after death.
- Avoiding conflicting claims: Two states can claim you as a resident, leading to double taxation on your estate. To avoid this, it’s important to document your domicile. Actions like registering to vote, maintaining a driver’s license, and having your primary physician in one state can help prove where your true home is.
State-Specific Estate Taxes
Estate taxes are an essential consideration for snowbirds. Not all states have estate or inheritance taxes, but those that impose such taxes may have different exemption thresholds and rules.
- Know each state’s rules–Some states have their estate taxes in addition to federal estate taxes. The exemption amounts vary from state to state, meaning you could be exempt in one state but liable in another. Knowing each state’s exemption limits and estate tax rules is crucial for effective planning.
- Plan to minimize state estate taxes–If your primary residence is in a state with an estate tax, consider how to minimize the impact. One option may be changing your domicile to a state without an estate tax, but this requires careful planning to ensure you meet all residency requirements.
Using Trusts to Protect Your Assets
Trusts are valuable for minimizing estate taxes, especially if you have properties in multiple states. Snowbirds can benefit from setting up certain types of trusts that help reduce tax liabilities and simplify estate administration.
- Revocable living trusts–A revocable living trust can help you avoid probate in multiple states. By transferring ownership of your properties into a revocable trust, you can ensure a smoother transfer of assets without going through probate courts in both states. This can save time, money, and stress for your loved ones.
- Irrevocable trusts–An irrevocable trust can remove assets from your taxable estate, which may help reduce state estate taxes. Once assets are transferred to an irrevocable trust, they are no longer considered part of your estate, which can lower your tax liability.
Gifting Strategies to Reduce Estate Taxes
Gifting is another strategy snowbirds can use to minimize estate taxes. By gifting assets during your lifetime, you can reduce the overall value of your estate and potentially lower the tax burden for your heirs.
- Annual gift exclusion–The IRS allows you to gift a certain amount to any individual each year without incurring gift taxes. Utilizing this annual exclusion can help you gradually reduce your taxable estate while also benefiting your loved ones.
- Consider state gift tax rules–Some states have rules regarding gift taxes, so it’s important to understand how these may apply based on where you reside. Consulting with an estate planning attorney can help ensure you’re making gifts in a tax-efficient manner.
Professional Guidance for Dual-State Tax Planning
Estate planning for snowbirds is complex, particularly when it comes to tax implications in two different states. Working with an experienced estate planning attorney is essential to ensure the plan’s effectiveness. At Merlino & Gonzalez, we help snowbirds create estate plans that minimize tax liabilities and protect assets across state lines. Contact us today to schedule a consultation and ensure your estate plan reflects your unique lifestyle and financial goals.