Financially Smart Dream Retirement Location

Retiring In Your Dream Location

There is a state death tax in 30% of the states in the USA. So the real question becomes, where do you want to be a “resident” at the end of your life? This is going to be important for when you retire.

For many years, we’ve often said, “Condos in Florida are free.” This statement holds true because of the significant tax savings that can result from changing your state of residency late in life. For example, if you lived in New England and passed away with an estate valued at $5,000,000, the tax bill could be as high as $400,000 or more in states like Massachusetts, New Jersey, or Connecticut. While specific rules have evolved over time, the basic principle remains the same. If you purchase a condo in Florida, establish residency there, and save your estate $400,000 in state death taxes, it effectively means the condo was free.

Now that the federal estate tax exemption is approximately $22,000,000 per couple, the primary focus of estate tax planning has shifted to state-level death or inheritance taxes. Some states, such as New Jersey, tax the recipients of the inheritance rather than the estate itself. Meanwhile, in Massachusetts, estates valued above $2,000,000 incur a state death tax that escalates rapidly, reaching rates of up to 16%.

If you love your current home and your children are settled in a state with a high death tax, such as New Jersey, and your estate is substantial, the time to plan is now. Early and strategic planning can significantly reduce the tax burden on your estate and your heirs. Here are a few tips you can discuss with your estate planning lawyer and financial advisor to begin the process.

1. Utilize a Credit Shelter Trust

A credit shelter trust can be an effective tool to double your state death tax exemption. For instance, in Massachusetts, the state exemption is $2,000,000 per individual. By creating a credit shelter trust, you can increase the exemption to $4,000,000 for a married couple. This strategy involves allocating assets into a trust upon the death of the first spouse, allowing the surviving spouse to utilize the state exemption twice. This approach can save hundreds of thousands of dollars in taxes for estates that fall within this range.

2. Consider Trust Situs in Tax-Favored States

If your children live in high-tax states such as New York or New Jersey, you may be able to situs (or relocate) a trust to a more tax-favored state like Delaware or Nevada. By establishing the trust in one of these states, you can ensure that the inheritance your children receive is not subject to the high state taxes of their current residence. This is especially advantageous if you are older, your children are financially independent, and your grandchildren have graduated from college and moved on.

For example, if your children eventually migrate to tax-friendly states like Florida or Arizona, they can receive their inheritance without the hefty tax burden that might apply if the trust remained in their original state of residence. By planning ahead and utilizing these strategies, you can preserve more of your wealth for your family’s future.

3. Leverage Life Insurance in Trust

Another popular and effective estate planning strategy is converting some of your assets into triple tax-free life insurance held in a trust. This approach has been famously utilized by individuals such as Malcolm Forbes of Forbes Magazine. Life insurance in trust provides an inheritance that is free from income tax, capital gains tax, and estate tax.

This strategy can be particularly useful for individuals who have maxed out other estate planning options or who want to provide their heirs with a guaranteed tax-free benefit. By working with an experienced financial advisor, you can structure a life insurance plan that ensures your family receives the maximum benefit while minimizing taxes.

4. Plan for Late-Life Living Arrangements

In my book Smart Financial Longevity Planning, I provided numerous examples of how to structure your living arrangements in later life to benefit your children and grandchildren on a tax-favored basis. One of the most effective strategies is carefully considering where you reside during the final years of your life.

For example, if you establish residency in a state without an estate tax, such as Florida, Texas, or Colorado, you can potentially save your estate hundreds of thousands of dollars. This not only benefits your heirs but also provides peace of mind that your wealth will be preserved and passed on efficiently.

The Personal Perspective: Why I Love Colorado

People often ask me why I love the state of Colorado. For over 30 years, our home there has been a source of joy for my family and me. Beyond the natural beauty, the mountains, and the skiing, Colorado offers another significant benefit. As someone who has spent decades in the planning business, I have always appreciated that retiring in a state without an estate tax allows me to avoid the large tax burden that would have applied if I remained a resident of Massachusetts, where I worked for most of my career.

For me, Colorado’s lack of a state death tax has always felt like an added bonus. It is as though part of the cost of the home has been paid for by avoiding taxes that would have been due in Massachusetts. Of course, the decision to live in Colorado is not purely financial. The vibrant communities, the excellent quality of life, and the opportunity to spend time enjoying outdoor activities have all made it an ideal place to live and plan for the future.

Final Thoughts: Where Do You Want to Be?

The question of where to live late in life is not just about personal preference. It is also about financial strategy and ensuring that your estate is structured in a way that minimizes unnecessary tax burdens. Whether you choose to move to a tax-friendly state like Florida or Colorado or explore creative trust strategies, the key is to start planning early. By working closely with experienced professionals, you can develop a customized plan that aligns with your goals and protects your family’s future.

Ultimately, the choices you make about your late-life living arrangements have the potential to impact your family for generations. With thoughtful planning and the right strategies, you can leave a legacy that reflects your values, secures your wealth, and supports your loved ones in the best possible way.