Your “snowbird” friends are back in the Midwest for the summer. You hear how much they did not miss our extreme cold weather, shoveling snow, driving in a snowstorm or sliding on ice. Some of your snowbird friends talk about golf in January, February and March. Others talk about being closer to children and grandchildren.
Many Midwesterners, particularly retirees or people nearing retirement, are motivated by such comments to consider the idea of either “permanently” moving out-of-state or buying a second home out-of-state. In connection with your discussions with your snowbird friends you hear there may be tax benefits or a substantially reduced cost of living in some of the states where your friends have moved. You also learn, not surprisingly, that some of your friends are not paying state income taxes on their retirement income or other forms of fixed income as a result of their move out-of-state.
Many factors affect a person’s decision to move out-of-state or to have a home in two or more states. Obviously, weather, quality of life, the ocean, lakes, mountains, family and friends and access to quality medical care may well trump any financial or tax considerations, but the purpose of this article is to address, to some degree, some of the more mundane factors that may affect where to relocate. This article will not go into the actions that should be taken to demonstrate a move that will result in a change in domicile, but if you do decide to change your domicile and state tax residency, planning and undertaking many actions will be critical to successfully achieving such change.
● State Income Taxes. Besides quality of life and a desire to be closer to family and friends, among other subjective reasons for a change in domicile, an objective to lower or even eliminate one’s state income tax liabilities may be a primary factor for a move out-of-state. Currently, seven states do not have an income tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming. Two other states – New Hampshire and Tennessee – tax only interest and dividend income of residents. The rest of the states and the District of Columbia each has their own rules and regulations to determine who is a resident of their jurisdiction and thereby subject their residents to state income taxation on their residents’ world-wide income. Even if you establish a domicile and physical residency in one of these tax-friendly states, do not forget that an individual will continue to pay income tax to their former home state (and possibly other states) in which rental property is located or where the individual continues to derive income, such as a family business. While generally speaking income from investments, such as capital gains, dividends and interest, as well as retirement income, may no longer be taxed by a former home state as a result of a successful move, wages and bonuses that are derived from work performed in the old home state, as well as rents, gains, and profits from real estate or business activities in the former home state (or other states in which such real estate or businesses are located) will continue to be taxed by such state.
On the flip side, if state taxation is a significant factor in determining your new home state, there are other states a person should try to avoid. Based on a September 2014 report by Kiplinger, the following states impose the highest taxes on retirees, with Rhode Island’s ranking of first being the highest tax state in Kiplinger’s view:
10. New York;
9. New Jersey;
2. Vermont; and
1. Rhode Island.
Five of these states follow the federal rules and tax social security benefits up to 85% of the amount. Exemptions for other types of retirement income are limited or nonexistent. In addition, while individuals typically pay lower federal tax rates on long-term capital gains, most of these states tax capital gains and qualified dividends at ordinary income rates. For example, the combined, maximum federal and state capital gains rate in Nebraska is about 31%. In California, the combined maximum capital gains rate is about 37.1%.
● Filial Responsibility Laws. In 29 states and Puerto Rico, one will find so-called “filial responsibility or support” laws on the books. In other words, a parent, a child or other family member, in addition to a spouse, may be potentially liable under applicable state law for a family member’s care and treatment under certain circumstances. Until fairly recently, these laws have been generally ignored; however, some recent court decisions indicate there might be renewed interest in enforcing them.
At one time, as many as 45 states had statutes obligating adult children to care for their parents. Some states repealed their filial support laws after Medicaid was enacted. Other states did not, and a large number of filial responsibility statutes remain. If it is found that a parent is indigent or unable to provide for his or her own support, an adult child could face civil liability, and in some states, criminal sanctions for failure to support his or her parents.
For example, in 2012, a Pennsylvania court decision allowed a nursing home to collect a parent’s unpaid $93,000 bill from her son after she moved to Greece even though there was no evidence that the son had engaged in any fraudulent transfers to divert or hide his mother’s assets. While earlier court decisions generally required a finding of “unclean hands” by a child, i.e., actions to illegally transfer a parent’s assets to avoid payment of such bills, the Pennsylvania court found the son liable under Pennsylvania law despite the absence of fraudulent conduct by him.
No one knows how many states will renew enforcing these filial responsibility laws or what defenses will be allowed; however, a person considering a move to another state should consider whether, and to what extent, such laws exist and their potential effect on parents and family members alike.
● Community Property Laws/Tenancy By the Entirety. Ten states have adopted community property laws. They are: Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin (four of which are “no state income” tax jurisdictions). If a wealthy married couple with a strong marriage is considering relocating to one of these states, community property law may allow a step-up in basis in most or even 100% of the couple’s property when the first spouse dies while domiciled in such state. Hence, pre-death gains that are embedded in a married couple’s appreciated assets may disappear for income tax purposes at the first death, resulting in substantial savings of capital gains taxes upon later sales. If the married couple’s net worth is below their combined, applicable federal estate tax exemption equivalents of $10.86 million (or $5.43 million per spouse), this step-up in basis is federal income and estate tax-free. In contrast, if the married couple lives in a non-community property law state, the step-up in basis may be 50% or less unless the spouse who dies first owns all or nearly all of the couple’s assets at the time of such death.
Separate and apart from community property law considerations, an individual considering a move out-of-state may want to take into account a form of ownership called “tenancy by the entirety.” Twenty-five states have this form of joint ownership between a married couple. This is a type of concurrent ownership in property by a married couple whereby each owns the individual whole of the property, coupled with the right of survivorship. If one of the spouses is at substantial risk of creditor lawsuits or even bankruptcy, a married couple, residing in one of these 25 states and owning real estate or investments as tenants by the entirety, may be able to avoid collection against such assets by the debtor spouse’s creditors. Under a tenancy by the entirety, creditors of an individual spouse may not attach and sell the interest of the debtor spouse: only the creditors of the couple may do so.
Another important difference between a tenancy by the entirety and joint tenancy or tenancy in common ownership is that a tenant by the entirety may not sell or give away his interest in the property without the consent of the other tenant.
Although beyond the scope of this article, a financially strapped person may consider moving to a state that has a very favorable homestead exemption law. Similarly, although a recent U.S. Supreme Court decision held that an inherited IRA is not protected as a “retirement account” under federal bankruptcy law, a surviving spouse may still be able to protect an inherited IRA through his or her state exemptions. Bankruptcy Code §522(b)(3)(A) requires the debtor to meet a significant residency requirement and reside in a state that requires or permits the use of state exemptions. The states that appear to have the best protection for inherited IRA accounts (and by extension, subsequent rollovers) are: Alaska, Arizona, Florida, Idaho, Missouri, North Carolina, Ohio and Texas.
As this article shows, a person’s decision to change his or her state domicile/residency should include an analysis of many financial and tax factors such as state and local income taxes, sales taxes, property taxes, state death taxes, filial responsibility laws, property law, and creditor protection laws, among others. Most decisions to relocate; however, will still substantially depend on proximity to family and friends, quality of life, weather, etc. Nonetheless, a wise planner would weigh all these factors before moving, and once the decision is made, take the actions that are needed to effect a successful change in domicile while avoiding being physically present in the person’s former home state beyond what such state allows.
If you have questions concerning a possible change in domicile/residency or want to know about how to accomplish a successful relocation from a legal and tax standpoint, please contact one of the lawyers in our Tax Practice Group or your McGrath North attorney.
 In order to successfully “move” for state tax purposes, one must change his or her domicile as well as their place of physical residency. Although beyond the scope of this article, all states start with the premise that individuals who are “domiciled” in their state are “residents” for tax purposes. “Domicile” generally means the place where a person voluntarily establishes himself or herself (and family) with the present intention of making it his or her true and permanent home. A person can only have one domicile at a time. Physical residence is based on a set of rules that when met, cause the person to become a resident for state tax purposes even though the person is domiciled in a different state. In Nebraska, residency will be established by an individual who, for an aggregate of more than six months, both maintains a “permanent place of abode” within Nebraska and who is present in Nebraska. Such tax residency results even though the individual has changed his or her domicile to another state.
 Kiplinger took into account state and local income taxes, property taxes, sales and use taxes, and state estate and inheritance taxes in making this ranking.
 Nebraska does not have a filial responsibility law, however Iowa does. Four of the “no- or low-state income tax” states, Alaska, Nevada, South Dakota and Tennessee, have such statutes. Arizona, California, Florida, Texas, Washington and Wyoming, among others, currently do not have such statutes.
 In any case, planning may be available to retitle assets from a healthy spouse to a terminally ill spouse to try and obtain a step-up in basis in all the couple’s assets if certain other requirements are also met.