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!
Everything’s bigger in Texas, but not when it comes to dying. Texas is a community property state with the bonus of no state inheritance or estate taxes. Here’s a perk for those retired in Texas: retirement income is untaxed and there is no state income tax!
It isn’t just gaming and warm weather that makes Nevada an attraction, it’s estate laws, too. Nevada is also a community property state, and another one that doesn’t have a state inheritance or estate tax. No need to roll the dice on a state income tax, either, since Nevada doesn’t have one, and they won’t tax either your retirement or social security income.
Potatoes are not the only great consumer staple found in Idaho, as this community property state does not impose an inheritance or estate tax upon death. In addition, Idaho lets you lighten up your estate load by allowing you to gift out assets tax free without a cap, a nice way to reward anyone you want while lightening the estate load from federal taxes. Oh, and one more nice perk: your social security benefits are exempt from taxes.
Out on the Bayou, community property rules apply, and the state does not impose an inheritance or estate tax upon death. Social security income is exempt from taxation, and retirement benefits are are similarly exempt for state and local employees, military and civil service workers. You can also exempt up to $6,000 in annual retirement income. “Laissez Les Bon Temps Roulez”
The “Last Frontier” may have the best of all worlds except for community property laws: the state has no inheritance or estate taxes, does not impose a state income tax, and won’t tax social security payments. It also has one perk not found anywhere else: last year it provided a $1,174 rebate to every citizen courtesy of the state’s oil revenue savings account.