Borderline Tax and Estate Planning Know the Rules — and the Numbers — Before Making Your Move

While much of the discussion in the past year has regarded the changes in the federal estate-tax laws, it is important to also consider issues regarding the differences in tax laws within respective states. When you move from one state to another or live in one state and work in another, there may be tax consequences that need to be reviewed, hopefully before your move is made.

Both Massachusetts and Connecticut are roughly in the 5{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} bracket, so there is not so much of a significant difference in the income-tax consequences when you work in one state but live in the other. If you file multiple state income-tax returns, you normally receive a credit for the tax paid from one state to another, so there is not a full duplication of income-tax liability in multiple jurisdictions. However, you should consider the capital-gains treatment, potential retirement-plan exemptions, and other consequences of borderline planning. For example, you may live in a state where a state retirement plan is exempt from income taxation and move to another state that taxes your retirement plan.

In addition, some states allow for income tax exemptions of IRAs, since they were not deducted on the state return, when they may have been deducted on the federal return. Therefore, the income received from your IRA, together with all gains and additions, may be taxable in one jurisdiction and not in another.

You must also consider the estate tax consequences of living (or dying) in one state versus the other. For instance, in Massachusetts, there is no gift-tax limitation on how much you may give away during either one year or over your lifetime. Although you may still be limited or restricted by federal tax laws, no Massachusetts gift-tax return is required when making a gift. However, upon your death, the amount of the gift may be utilized in determining the net estate tax due, as the total taxable estate does include gifts made during lifetime, within limitations. Nevertheless, the tax that may be assessed may be only on the amount you owe at the time of your death, although the gift during lifetime is utilized for calculation purposes.

In a state such as Connecticut, there is a gift tax that is similar to the federal limitation of $1,000,000 during lifetime, in addition to the annual exclusion gifts of $13,000 per year. The first $13,000 per donee is non-taxable and basically non-reportable. However, as soon as you make a gift greater than $13,000 to an individual during the year, the requirement to file a gift-tax return may be required. It is important to keep in mind that, if you gift $13,000 to an individual during a year and then give that same individual a Christmas or birthday present, or similar gift, they are now over the threshold for gift-tax purposes, and the return is required.

During the summer of 2009, Connecticut revamped its entire gift- and estate-tax regimen to provide for a lifetime exemption of $3,500,000 and reduce tax rates. In December, however, the General Assembly attempted to postpone the estate-tax change for two years while raising the rate above what they currently anticipated. At the time of the writing of this article, it is unknown whether the General Assembly will override the Governor’s veto or what the status of the tax rates will be.

Similar to the federal law, where the exemption is currently unlimited (in 2010) until Congress and the president can agree on a more equitable plan, the matter remains as is. There are significant planning opportunities n 2010, since there is no estate-tax due. However, it is anticipated that, before long, the federal government will impose an estate tax again, possibly back to the pre-2010 limits of a $3.5 million exemption per person or $7 million per couple with a 45{06cf2b9696b159f874511d23dbc893eb1ac83014175ed30550cfff22781411e5} tax rate over those thresholds.

However, due to the continuing economic crisis and the needs of both the federal and state governments to raise funds, there is uncertainty as to what the federal, state of Connecticut, and other potential state estate-tax issues may be.

Therefore, before changing your residence from one state to another, specific consideration should be given as to whether one state has a better opportunity for lower income and estate taxes than another. The rules and regulations change from time to time, so it’s a good idea to speak to a qualified professional before you make a decision to move. v

Attorney Hyman G. Darling is chairman of Bacon Wilson, P.C.’s Estate Planning and Elder Law departments, and he is recognized as the area’s preeminent estate planner. His areas of expertise include all areas of estate planning, probate, and elder law. Darling is a past president of the Hampden County Bar Assoc., teaches elder law at Bay Path College, and is an adjunct professor at Western New England College School of Law (the LLM program,) where he teaches elder law. He hosts a popular estate-planning blog at bwlaw.blogs.com; (413) 781-0560;hdarling@baconwilson.com