As I was preparing to sign my tax returns, my accountant, who doubles as a financial adviser, proffered some advice: “Whichever of you or your wife becomes a surviving spouse, sell your house in Maryland and move to Virginia. It’s a better place to die in, due to the estate tax laws.”
Sound advice, if somewhat macabre.
But let’s face it: Eventually we’re all going away, so it makes sense to plan ahead as much as possible to minimize the tax consequences of dying. That simply means finding the answer to wherever tax laws place the lowest burden on estate and inheritance taxes to a surviving spouse and eventual heirs.
Of course, nothing is quite so easy. But we do have two very big criteria that help cut through the clutter of 50 states: 1) community property laws, and 2) state estate and inheritance tax rates.
Community property-state laws allow for a step-up in basis on assets such as real estate and stocks, to the date of death. So, what does that mean?
For a surviving spouse, it means an up-to-date basis on an asset from the date of death. So if you and your spouse bought a house for $100,000, and on the date of death the house is valued at $1,100,000, the “cost” basis is stepped up. Sell the house the next day for $1.1 million and you have no capital gains taxes due. Note that heirs also get a step-up upon the death of the second parent. If the house is worth $1.5 million at that time, that is the tax basis for estate purposes. So living in a community property state has some advantages.
As for state inheritance and estate taxes, to date only 22 states impose any kind of tax on both, so living in one of the other 28 states could make a lot of sense.
With both issues in mind, here is a list of five states that combine both criteria. For more information on each of the 50 states, click here. And of course, before making any final decisions, check with a tax or estate-planning adviser!