Multi-State Property Ownership – Convenience at a Cost?
Congratulations! You made the decision to escape the long, dark and cold winter months and relocate to year-round sunshine and warm weather. After consulting with your tax professional, estate attorney, and financial planner, you have committed to spending the necessary time and have taken the steps needed to claim residency and start enjoying a new lifestyle in your warm-weather state. However, family has you wanting to stay close. Why not keep a residence so that it is convenient to come and go easily throughout the year? Although this may be the right thing to do, there may also be a caveat – state estate taxes!
The State Estate Tax Trap
Some states (12 states and the District of Colombia, to be exact) impose their own estate tax, which is separate from the federal estate tax and is assessed at exemption levels that are far less than the current federal exemption amount of $12,060,000 per person in 2022.
Illinois, for example, imposes a tax on estates with a gross value of more than $4 million. This rule applies to both residents and non-residents who own real estate or other tangible property in the state. This can include bank and investment accounts, real property, vehicles, business interests, assets held in certain types of Trusts and certain taxable gifts made during the decedent’s lifetime, as well as some transfers made prior to death.
Surprised? You are not alone. This is a tax trap that many do not realize and can be critical for families who change residency and maintain property in a state that imposes an estate tax. The following Illinois example will help illustrate:
Joe is single and has assets of $10 million, including a $7 million personal investment account, a $2 million home in Naples, FL, and a $1 million home in Chicago. Joe recently retired and changed his residency to Florida. He spends more than one-half of the year in Florida and has taken all the necessary steps to claim Florida residency.
Under current law, when Joe passes away, there is no federal estate tax due since the value of his estate is below the federal exemption of $12,060,000. Florida being a tax-friendly state imposes no estate tax; however, Illinois imposes a state estate tax on estates over $4 million. Since Joe is not an Illinois resident, his Illinois situs assets consist only of his Chicago home valued at $1 million, which is less than the $4 million Illinois exemption.
However, Joe’s estate will owe over $90,000 of Illinois estate tax! How can this be?
In non-legal terms, the Illinois estate tax statute contains language that results in an estate tax due which equals the amount of tax that would be owed if all the decedent’s assets had Illinois situs, multiplied by the percentage of the decedent’s assets that actually do have Illinois situs.
Applying this to Joe’s estate and the amount of tax that would be due if all of Joe’s assets had Illinois situs is over $900,000. Since 10% of Joe’s assets have Illinois situs (his Chicago home), Joe’s estate will owe an Illinois estate tax of 10% of the total tax had Illinois situs been applied on his entire estate.
When planning one’s estate for estate tax savings, rules can be tricky, especially when property is owned in a state that imposes a separate estate tax and with an exemption that is lower than the Federal exemption. With proper planning and guidance from an estate planning professional, this type of tax trap can be avoided or, at a minimum, will not come as a surprise. Please reach out to your BDF team with questions or to help review your existing estate plan to determine if there are any “surprises” that you are unaware of.
As a member of BDF's Business Owner Team, John is adept at helping business owners integrate their unique business opportunities and risks into their personal wealth management plan. He finds that business owners, in particular, are often so focused on making sure that their business operations are running smoothly, they may overlook their personal financial well-being. John holds the ACCREDITED ESTATE PLANNER® designation.