Like millions of other Americans, Paul T. Williams and his wife, Suzy, carefully selected places they would live, work and retire, based on the best economics and lifestyle.
But neither the Williamses nor most other people have given much thought to the best place to die. Sure, it may be a bit macabre, but with death come probate procedures and estate, income and capital-gains taxes, all of which can take a toll and worsen a survivor’s grief.
Williams, 63, a senior vice president and chief fiduciary officer at the Northern Trust Bank of Florida in Miami until this November, retired with his wife to a home they built in Kalispell, Mont., 70 miles south of the Canadian border. They chose their site for its year-round recreation, medical facilities and mild climate, influenced by weather from Puget Sound.
The Williamses said they considered the death consequences of their choice, but, in Paul’s words, decided that “tax matters should not drive personal decisions.”
But others might want to weigh a number of issues, such as death taxes, probate procedures and trust laws, plus other financial issues, such as sales, real estate and income taxes, that ultimately affect the size of an estate left to heirs.
Until recently, New York State was the most expensive place in the country to die because of the combined federal and state estate tax rate of 60 percent, said Joshua S. Rubenstein of the New York law firm Rosenman & Colin. But New York, like some other states, is trying to retain permanent residents–and hold on to their money–by eliminating or paring taxes.
Last August, Gov. George E. Pataki signed into law a bill that reduces New York’s estate or death tax from a maximum of 21 percent to the amount allowed as a credit against the federal estate tax by Feb. 1 of the year 2000.
Consider a hypothetical case: If a person dies this year with a $1 million taxable estate, the federal estate tax would be $119,800 and the New York State tax would be an additional $53,500. But if the person waited until the year 2006 to die, there would be no federal estate tax and no New York tax, resulting in a savings to heirs of $173,300, Rubenstein said.
In Illinois, the federal estate tax would be the same on that $1 million taxable estate, but the current Illinois state tax would be less–$33,200, said attorney Bernard Wall of the Chicago law firm Carroll, Kline & Wall. The same dramatic savings would apply in Illinois for the year 2006.
All in all, no state emerges as a hands-down winner–or loser. Historically, many migrated to Florida because of its lack of income and inheritance taxes and the allure of warm weather. “But it offers minimal Medicaid benefits and no home health care. It’s a good place to come if you’re healthy and wealthy, but not if you’re poor and ill,” said Jerome L. Wolf of the Boca Raton, Fla., law firm of Eckert Seamans Cherin & Mellott.
Nevada is currently seeing an influx of newcomers. In addition to no income tax and lax residency requirements, the state has a reasonable 7 percent sales tax, low property taxes capped at 5 percent of assessed valuation and good weather. On the down side in some people’s eyes is that Nevada has not adopted the Uniform Probate Code. The UPC specifies rules for the administration of an estate and permits independent administration without direct court supervision if all parties agree.
If you decide to relocate, remember that you have to establish legal residency in your new state, which requires some maneuvering. While you can have more than one home, you can’t have more than one legal domicile. The state you designate for that status has the right to collect income, property, estate and inheritance taxes, Wolf said.
Also, if you continue to own a home in another state and/or spend “significant” time there, some of your income and estate may be double taxed, though the state in which you live may give you some credit. What’s significant? Some states set a specific limit of days whether you stay in a permanent abode or a hotel. Illinois has no such rule, but determines residency based on facts and circumstances, Wall said.
Following are other key issues to help you evaluate the death-friendliness of your state:
– Estate or death tax. One of the major issues in estate planning is what is called the “pickup” or “sop” tax, which all states have. The vast majority of states–35, including Illinois–limit their death tax to the pickup tax so that survivors don’t pay an additional tax on their decedent’s estate tax return.
– Probate procedure. Eighteen states follow the Uniform Probate Code. (They are Alaska, Arizona, Arkansas, Colorado, Hawaii, Idaho, Maine, Michigan, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Pennsylvania, South Carolina, South Dakota, Utah and Wisconsin.) You can avoid probate, however, by establishing a living trust and not having any property in your name when you die. But the latter is difficult to accomplish, Rubenstein said.
While some contend that it takes longer and costs more to file a will in states like New York and Illinois that haven’t adopted the UPC, others like Rubenstein and Wall disagree. Rubsenstein sees several advantages, including that they can learn quickly whether anyone contests the will.
And Wall says that though Illinois has not adopted the UPC, it has “something that’s along the same lines and allows independent administration. You file a will, have an estate opened and can administer it without court supervision. At the conclusion, the estate can also be closed without a formal accounting.”
– Forced heirship. Most states require spouses to receive one-third of an estate. In the eight community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas and Washington), a spouse gets one-half of all marital assets, even though assets may have been held only in the decedent’s name.
– Income issues. For those who consider relocating but fear losing tax-free income from municipal bonds and state pensions, the more significant factors are the tax rate of the state where they move, since the income from a bond remains federally exempt, according to Marvin Loh, vice president and director of fixed income research at Fidelity Capital Markets in Boston.
You also should consider how your current and new state will tax your retirement benefits once you draw qualified and non-qualified pension distributions, according to Pudlin.
Wherever you choose to live and die, remember you and your heirs can’t escape paying what takes the greatest chunk from your earnings and estate: your federal income and estate taxes.
