Separate State Residences & a QTIP Trust Can Help Married Couples Limit Their Taxes

May 12, 2020
Brad Galbraith, Esq.

Should couples move apart to increase tax savings? Although moving to a different state than your spouse might seem like an extreme estate planning strategy, for some married couples the benefits might also be extreme. Let us share more on this strategy with you.

Essentially, there are high-tax states, low-tax states, and zero tax states when it comes to income and estate taxes. All points on the spectrum have corresponding advantages and disadvantages, but from a strictly asset maximization perspective the lower the tax regime the better. 

Consider that California, Minnesota, and New Jersey are among the highest taxed states in the country, and Pennsylvania, Arizona, and Ohio all have state income tax rates under 5 percent. Now consider that seven states have no income tax at all. That means top earners in California pay 13.3 percent of their income to the state treasury every year, those making $58,000 pay 9.3 percent, but Texans and Floridians pay nothing. A creative estate plan could take advantage of these vastly differing tax rates and create huge savings. 

If a spouse living in a high-tax state moved to a low-tax state, then their personal income would be taxed at the new lower rate. That is a no-brainer. The spouse remaining in the high-tax state could also gift income-producing intangible assets to the spouse newly living in the low-tax state. Intangible assets are not physical in nature and include items such as patents, literary works, broadcast rights, computer software, and lease and franchise agreements. After a reasonable amount of time, the low-tax state spouse could transfer the assets into a Qualified Terminable Interest Property trust, or “QTIP” trust.

QTIP trusts are a type of marital trust that have many benefits. In this scenario it could serve as a grantor trust that makes asset distributions back to the spouse living in the original high-tax state. The distributions, however, would be taxed at the lower-tax state rate. It is a lot to follow but basically the couple’s intangible assets would flow in a circle and the couple would keep more of their own money. The higher valued estate would also offer more of an inheritance for the couple’s estate beneficiaries.

A QTIP trust may not be the right fit for every married couple, but for those open to moving and for those already living in different states, the estate vehicle could be immensely beneficial.  We encourage you to schedule a meeting with an attorney in our firm and learn more about these key benefits to your estate plan.

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