Unpack & Update Your Estate Plan
Are you one of the 4.7 million individuals that moved out of state last year to be closer to family, a new job, retirement, or to find a less expensive place to live? Whether you already crossed state lines or are considering an upcoming interstate move, you likely created a moving checklist to include updating your address, obtaining a new driver’s license, finding new physicians. Unfortunately, many people fail to add a line item on the checklist to ensure they update their estate planning documents. Below we discuss key differences across the country, and why it is important to review your estate plan after an interstate move.
Your estate plan likely consists of powers of attorney for medical and financial decisions, a will, and a revocable trust. Know that your existing plan is likely still valid, even when you move to a new state. However, estate plans are drafted based on the laws where you lived then, not your new state. Laws may significantly vary between states, affecting your income tax, state estate or inheritance tax, estate planning, and marital property. Consequently, what may have been an appropriate and efficient plan may not be as favorable in your new home state.
Why deal with the hassle and expense?
Consider the age of your estate plan – did you file it and forget it? Regardless of relocation, we recommend reviewing your plan every five years, upon any major life change for you, your beneficiaries, or your fiduciaries (birth, death, marriage, divorce), and upon any changes in tax laws.
Importantly, keep it simple for your family. Updating your plan can reduce unnecessary stress or unintended consequences resulting from the difference in laws. Have a local attorney review your plan. Below are some of the considerations that may be impacted by your relocation:
General Differences: Even with a valid plan, attorneys and other professionals that may need to interpret your documents will not have experience in the prior state’s laws. Forms and authorizations are different, and the same terms might have different legal meanings. Consider the typical Ikea assembly story – Maybe the manual has a complicated reputation, but imagine the DIY assembly without one.
Consider your medical care – Health care power of attorneys and other medical directives vary by state. Medical personnel are likely only familiar with their home state’s typical forms. If you are unable to share your medical information or make informed decisions, your agent’s authority may be delayed by an out-of-state document. Legal counsel may need to confirm your documents’ validity and your agent’s authority, impeding decisions that could relate to your life-sustaining or end-of-life care.
Changes in “Key Players:” With your initial estate plan, one difficult decision was nominating which individuals you trust to act on your behalf for medical, financial, and estate matters. Consider if you named your local friend and then moved across the country. Geographically, important decisions during your life and upon your death may become logistically inconvenient, or unnecessarily time-consuming. Further, some states do not permit non-resident executors. Three states only allow a non-resident executor if they are related to you. And other states impose other requirements, such as appointing an in-state agent or posting a bond to protect your estate.
Establishing Domicile: It is important to establish which state you domicile in for many tax-related reasons such as state income tax, state capital gains tax rates, estate, and inheritance tax. Consider the impact on your state income tax if you moved from a high-income tax state (e.g., California, New York) to a state that does not impose state tax. Also, those same high-income tax states may challenge your domicile in an attempt to tax your income.
Determining domicile is based on various factors, especially if you maintain property or contacts in multiple states. Factors can include where you spend your time, work, register to vote or drive, and the address in your legal documents. Executing an estate plan in your new state could be favorable to establishing a domicile.
Marital Property: Marital property laws determine the division of assets between spouses upon death or divorce. Nine states (plus one opt-in state) recognize property as community property, treating all assets acquired during the marriage (though not gifts or inheritance) as equally owned by both spouses. Other states recognize “common law” property, which treats each spouse’s property as individually owned. If you move between different systems, your marital property should retain its character. Seek legal advice to determine how to prevent the loss of such status or whether the new system is more advantageous for your circumstances. For example, community property may be more beneficial at death for income tax purposes with the step up in income tax basis allowed for community property, but less favorable upon divorce. Consider this even if moving to a neighboring state, such as Oregon, a common-law state surrounded by four community property states.
The type of documents created for spouses may vary by state to take into consideration the overall marital property system. For example, spouses in community property states tend to have joint revocable trusts for all marital assets, though marital property in common law states may be held in individual names (to be distributed pursuant to the terms of your will) or separate trusts for each spouse.
Property Titling: Your new attorney should review the titling of your assets, whether owned individually, jointly, or by a trust with a spouse or non-spouse. Depending on your circumstances, it may be more beneficial to transfer title to the name of your trust or another convention permissible under your new state’s laws. Certain titling that may or may not be recognized across states, includes community property, tenants by the entirety, and joint tenancy, all with or without right of survivorship, which could impact the distribution of your property when you pass.
Property Laws: Some states have particular property laws that may impact your estate planning or be impacted by your estate planning. For example, Florida’s homestead laws may override your estate plan, as you will be required at your death to distribute your primary residence in the state to your spouse and/or children. Or, your estate plan or titling of assets could inadvertently impact California’s complex property tax regime when you pass away. California property taxes are tied to your purchase price rather than the fair market value, which is advantageous given some property values increased 25-30% (or more) over ten years. Generally, the property base for tax purposes will be reassessed to the fair market value if there is a “change in ownership,” including the owner’s death. Your estate plan should be drafted to take advantages of any exclusions that may relate to your real estate in California upon your passing, such as a transfer of your property to or for the benefit of your spouse or a transfer of your primary residence to a child in limited circumstances.
Gift, Estate and Inheritance Taxes: While Federal estate tax only applies to decedents with estates above $11.58 million (2020), state estate, inheritance, and gift taxes may be imposed on decedents with a significantly lower net worth. Estate tax is based on the overall estate, while inheritance tax is based on the estate’s recipient. Only 18 states and the District of Columbia impose either state or inheritance taxes on residents and non-residents with property in the state. However, the tax rate, as well as the amount of your assets that may be excluded, varies, ranging from $1 million (Massachusetts, Oregon) to $5.7 million (Maine), and the tax rate can be as high as 20% (Hawaii) over the exemption amounts. Most states do not impose estate taxes on transfers to a surviving spouse and may be reduced based on your relationship to the beneficiary. Regardless of whether you move into or out of a state that imposes an estate or inheritance tax, your estate plan may need to be restructured or simplified to reflect the estate tax regime of your new home.
Connecticut is the only state that imposes a tax on lifetime gifts, though exempts $5.1 million (2020, to be adjusted to the Federal exemption by 2023). Maryland imposes a tax on transfers within two years of death.
Irrevocable Trusts: If you are the trustee or beneficiary of an irrevocable trust, discuss the impact of your new home state with your attorney. Each state determines the taxation, if any. If you are leaving California, this is likely favorable because of the increased tax rates there. However, suppose you are a trustee of an irrevocable trust and move to California. In that case, even if there are no assets or beneficiaries in California, your move will likely subject the trust to California’s taxes unless you resign.
How do I find an estate attorney?
Reach out to a new or existing tax or financial advisor who may have referrals. When selecting a new estate attorney, consider his or her legal experience specifically in estate planning, the percentage of their practice in estate planning, and whether they have multiple clients in your same financial or family situation, as both simple and complex plans are available.
Important Disclosure: This report is for informational purposes only. Opinions expressed herein are subject to change without notice. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified, or attested to, the accuracy or authenticity of the information. Nothing contained herein should be construed or relied upon as investment, legal or tax advice. All investments involve risks, including the loss of principal. An investor should consult with their financial professional before making any investment decisions.
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