Month: November 2022

Adam Chodos, Esq. CPA

Millions reside in high tax states because of traditional advantages; higher earning potential, quality employees and service providers, major airports, culture, great schools, and strong real estate markets.  That has shifted dramatically in the last few years, accelerated by the recent tax trends.  More high net worth people, and their businesses, are relocating to low/no tax states as the effective cost of high tax states has escalated, tipping the scales.

Tax loads have risen with high tax states taxing even deeper into their remaining resident base.  This is exacerbated by the fact that state and local taxes are not fully deductible anymore; currently capped at $10k.  The deduction limit raises the true cost of living in a high tax state.  For example, a family in Greenwich, Connecticut with taxable income of $1M (state tax liability of $70k) and real estate taxes of $45k.  When fully deductible the true cost was $69k.  With only $10k deductible, the true cost rises to $110k.  

While most would like lower taxes, there is a practical limit to how far one will go.  There are tax incentive plans for U.S. territories (U.S.V.I and Puerto Rico) promising major tax savings if you relocate, hire locals, and invest locally.  Some tax averse families have gone as far as expatriating, voluntarily giving up U.S. citizenship, to move to a low/no tax nation. But these programs are extreme as it requires a dramatic life shift.  For a business, many of the current employees would not be willing to change to a new territory or country.  Obtaining high quality business support is a challenge in these regions (lower quality employees, less reliable infrastructure, less reliable government).  The recent natural disaster in Puerto Rico was a stark example of how lesser developed regions are ill-prepared to cope and have fewer resources.  While it may seem alluring to move to a Caribbean island, few active businesspeople can tolerate the slow pace for long. 

The simplest option became the plan for most – move from a high tax state (New York, New Jersey, Connecticut, Illinois, California, Massachusetts, Oregon) to a low/no tax state (Florida, Texas, Nevada, South Dakota, Wyoming).  The most popular destinations are Florida, Texas, Nevada and Arizona (not the lowest tax state but much less than the high tax states).  Some of the low/no tax states have not received much attention as the sophistication and business needs are not present (South Dakota, Wyoming).  The advantages of the high tax states have been lost over the years as many of the destination states (Florida and Texas in particular) have caught up in terms of refinement, good schools, quality employees and service providers, favorable homestead laws, international airports, restaurants, arts and cultural centers, and much better climates. 

Years ago, Texas and Florida were considered retirement locations and perhaps nursing home havens.  Over the past decade, they have become fully developed destinations with no state income tax.  Rather than coming for the sun, people come for the tax relief.  The sun doesn’t hurt though.

Adam Chodos Esq.

(c) Chodos & Associates, LLC

Adam Chodos Esq., CPA

After a lifetime of asset accumulation, death taxes can be a rude reality for families.  Currently federal death taxes are 40%.  Several states impose their own death taxes for an additional 3% to 12%.  The federal death tax does not apply until assets exceed $12.06 million, however, the Biden administration has made clear they wish to reduce the exemption to a lower level; likely in the $4m dollar range.

            The general objectives of estate planning are to minimize estate taxes, limit exposure to creditor claims, position our assets in the control of those best suited to manage them, and to protect loved ones by prearranging asset management for their benefit.  For well informed families, there are a wide variety of strategies available to achieve these objectives. 

Lack of preparation can have a heavy cost to the remaining family, including the forced sale of assets, loss of control of the family business, and shrinkage of income producing assets. An estate has just nine months to pay the estate tax bill.  During this transitory time vital decisions must be made as to how to create liquidity for tax payment, business continuity, and generally redistribute and manage assets.

A well structured plan usually employs tools such entitization (owning assets in LLCs, LPs, trusts) to achieve estate tax discounts, gifting programs, and opportunity shifting (lending funds to finance an opportunity likely to appreciate so growth occurs in younger generations hands). 

For the taxes that must be paid, the cost of paying estate taxes with the owner’s funds is the least efficient path.  Even if liquid assets are set aside for estate taxes, the earmarked fund is itself taxable bringing the trust cost much higher (close to double with combined estate tax rates at 50%).  The fund would also be income taxable, subject to creditor’s claims, and it is not practical to maintain such a high level of liquidity.

Since death triggers the tax obligation, we don’t truly need estate tax funding until the second death (the later death of the husband or wife). Survivorship life insurance policies insure both husband and wife, creating liquidity by paying out proceeds at the second death which coincides with when estate taxes are due.  Survivorship policies cost approximately half that of insuring each spouse individually, and if owned properly, the proceeds are free of income tax, estate tax, creditor claims, and probate. The cumulative premium invested in a survivor life policy for a healthy 60 year old married couple is approximately 10% of the death benefit produced (the cost is lower for a younger couple and higher for an older couple). 

Policy ownership is an important consideration; if the policy is owned individually or in a trust that was poorly designed, that can expose the proceeds to estate taxes.  Entities can offer control and flexibility while being tax efficient.

            The estate planning team uses available techniques and tools to reduce a family’s estate taxes to the lowest practical level given the family’s comfort.  For the estate taxes that remain, life insurance can act as an effective tool to assure family control over assets and deeply discount estate taxes.  If discounts are available through structured planning why would anyone pay full price?

Adam Chodos, Esq., CPA

(c) 2022 Chodos & Associates, LLC