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Domicile planning becoming key element of estate planning

On Behalf of | Nov 8, 2013 | Uncategorized

State laws vary as far as inheritance and estate taxes are concerned. Some states have neither; however, many have either one or both. Although Texas residents are currently spared estate and inheritance taxes, that may change within their lifetime. Many Americans are choosing to set up residency in states that do not levy such taxes. This has given rise to a new form of estate planning called “domicile planning,” which is intended to avoid estate taxes.

The federal estate tax exemption has now become permanent, but it is still more generous than what states typically offer. For example, in 2014, the federal government will exempt up to $5.34 million of an individual’s estate followed by a 40 percent tax added to anything above the exemption amount. However, states that levy additional estate taxes offer significantly fewer exemptions with higher tax rates. In some cases, the taxes go into effect on the first dollar of the inheritance.

What is considered state residency? Many states view those who live 183 or more days in the same state as residents for income tax purposes. However, for estate tax purposes, the rule of residence could be more abstract; for example, the tax might apply to the state in which people consider themselves to be residents. Those who live in Texas may travel to the Northeast for medical treatments and die in a hospital in New York, but they may not be governed by New York’s estate tax laws.

People may not necessarily pass away in the states they call home. Those who wish to implement domicile planning as part of their estate planning process may wish to review the estate taxes of each state with an attorney, keeping in mind that such laws might be subject to change.

Source: Forbes, “Where Not To Die In 2014: The Changing Wealth Tax Landscape“, Ashlea Ebeling, November 01, 2013