Moving Out of State Means It's Time to Update Your Estate Plan

01.13.2021 - Nita S. Vyas, Trust Counsel

If you recently moved to a new state or are planning to relocate soon, now is a good time to review your estate plan and make sure everything is in order. You might need to update your will, trust documents, titling of your assets, powers of attorney and health care directives.

The steps you take today could help avoid delays and complications in the event of incapacity or when your estate is ultimately settled. And it could have a significant effect on your estate’s tax treatment.

Here’s a brief rundown of our top recommendations when moving to another state.

Will and Trust Documents

If your will and revocable trusts were properly executed in accordance with the laws of one state, they are usually valid in other states. However, references to the laws of your previous home state can create complications. Your heirs might need to rely on the laws of another state to establish the validity of your will and trusts, and opinions from attorneys in two separate states may be required. For this reason alone, it usually makes sense to update your estate plan when you move out of state.

State-Level Estate Taxes

Another reason to update your estate planning documents is that estate taxes differ from state to state. Estate planning documents often provide for gifts equal to the amount that can pass free of estate or other transfer taxes. Depending on the laws of the state where you reside, that amount may change and with it, the amount your estate pays in taxes and who ultimately benefits from your estate.  

For example, plans for married couples often provide for the funding of a “credit shelter” or “bypass” trust after one of them passes away. This trust is typically funded with the amount that can pass free of transfer tax as part of the deceased spouse’s estate. If the couple is living in California (which doesn’t impose a state-level estate tax), that amount could be equal to the full federal estate tax exemption amount of $11.7 million in 2021. But if the couple moves to New York, in 2021 New York imposes a state estate tax on any transfers over $5.93 million. Depending on how the couple’s documents are drafted, it’s possible their gift to the “credit shelter” or “bypass” trust will remain tied only to the federal estate tax exemption despite the move and lower New York exemption.

Since the difference between the $11.7 million that funds the trust and the New York exemption amount of only $5.93 million exceeds 5%, New York will tax the entire value of the estate. At top rates of 16%, that could result in a New York estate tax bill over $1.3 million. That’s an expensive move!

And the reverse scenario presents concerns as well. If a New York couple moves to California, they could miss out on the full benefits of the federal and California tax laws if their documents provide their “credit shelter” or “bypass” trust only to be funded with the New York exemption amount. Alternatively, they could have gifts that they want tied to the New York exemption amount but aren’t drafted to function that way after their move. In those circumstances, a gift intended to be only $5.93 million could end up being $11.7 million, displacing funds from those who were really intended to receive them. We have seen children effectively disinherited by gifts to grandchildren that ballooned in size as a result of inattention to the function of a “formula” gift in changing circumstances. 

States with an Estate Tax or Inheritance Tax

1. Connecticut
2. District of Columbia
3. Hawaii
4. Illinois
5. Maine
6. Maryland
7. Massachusetts
8. Minnesota
9. New York
10. Oregon
11. Rhode Island
12. Vermont
13. Washington

Your Named Executor

Moving to another state can also raise questions for executors. Does your named executor meet the specific qualifications established by your new home state? Will your move make it inconvenient or impractical for your executor to serve?

Out-of-state executors may need to post a bond to serve. It also can be more time-consuming and expensive for someone who lives out of state to deal with all the details and logistics of sorting through tangible personal property or the sale of a home. In this context, it may make sense to appoint a corporate executor or trustee. Alternatively, if your move brought you closer to family and friends, you may have options for naming an individual executor or trustee that you didn’t have before, whether alone or as a co-executor or trustee with a corporate fiduciary.

Powers of Attorney and Health Care Directives

Power of attorney designations and advance health care directives, such as health care proxies and living wills, should always be updated after a move so they are consistent with the laws of your new state.

In most cases, power of attorney designations should remain valid in your new location. But some institutions resist or delay the acceptance of documents that do not conform to state statutory requirements or preferences. Therefore, it is a smart practice to update your power of attorney designations when reviewing your other estate-planning documents.

Community Property States

If you are moving into or out of a “community property” state, the titling of your assets should be reviewed to determine if any additional planning is required.

For example, converting community property to jointly owned property can reduce the amount a surviving spouse can “step up” in tax basis. Upon the death of the first spouse, community property receives a step-up in tax basis on 100% of the value of the asset. However, if you convert community property to jointly owned property, only the deceased spouse’s 50% of the asset receives a step-up in basis upon their death. 

States with Community Property Laws

1. Arizona
2. California
3. Idaho
4. Louisiana
5. Nevada
6. New Mexico
7. Texas
8. Washington
9. Wisconsin

Domicile and Taxes

Updating your will and trust documents indicates your intent to make the new state your legal domicile. This is an important step for income tax purposes, especially if you are moving to a new state while also maintaining your former residence and visiting it regularly. Some states challenge the residency of individuals who maintain residences in multiple states so the state can assess an income tax. It is important to establish ties with your new home state in order to provide evidence of your intent to make your new state your permanent home.

Irrevocable Trusts

Whenever you, your named trustee or a beneficiary change domiciles, the tax treatment of your irrevocable trust can be affected. That’s because the resident trust statutes of many states consider the domicile of the trust creator, trustee and beneficiary receiving distributions as factors when determining whether the trust is subject to state income taxes.

Work with your wealth advisors to review the terms of your existing trust document and determine if any changes in domicile trigger new income tax considerations. It might be necessary to change the trust’s situs or name a new trustee.

Retirement Plan Beneficiaries

Retirement accounts are typically governed by federal law, so you aren’t required to change anything when you move out of state. However, it is a good practice to make sure your beneficiary designations are on record with your employer and the financial institution that administers the plan. In addition, if your existing beneficiary designation distributes retirement assets to a trust created under your prior will or revocable trust, your beneficiary designations may need to be updated.

Fiduciary Trust is Here to Help

There’s always a lot to think about when you move. If you are moving to a new state, reviewing and updating your estate plan should be one of them. At Fiduciary Trust, we can help you make the process as easy as possible–from summarizing the terms of your current plan and identifying areas of concern to introducing you to an attorney in your new home state and helping you review new documents as they’re prepared.

This communication is intended solely to provide general information. The information and opinions stated may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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