Retirees Should Avoid
Out of State Overtaxation
By Albert B. Crenshaw
(c) The Washington Post
Sunday, June 11, 1995; Page H01
Each year, millions of Americans complete their working lives, grab the gold watch and head for
warmer weather, smaller communities or whatever circumstances they think they will like better.
But many of these retirees find it difficult to leave their old lives entirely behind. They may hang on
to their houses, keep an interest in a business, continue club memberships, even come back to live
for part of the year.
From a tax standpoint, such attachments can be dangerous. These connections, which retirees may
find hard to sever, may be enough in the eyes of the local tax collector to subject the retirees to
income and/or estate taxes in the state where they formerly resided.
The consequences can be substantial, especially because many retirees take taxes into account
when selecting a retirement location. Residents of Florida, where many retirees resettle, pay no
state income tax, while residents of the District, for example, pay a top rate of 9 1/2 percent.
"A lot of people want to get Florida residence to avoid {state} income tax but still don't want to
separate all their ties to this area," said William G. Brennan, a financial planner with offices in the
District.
Likewise, estate taxes differ. Most states, including Virginia and the District, have only a "pickup"
tax on estates. Such taxes are based on the federal estate tax, and generally add only modestly to
the burden. But others have different features. Maryland, for example, has an inheritance tax
imposed on heirs.
"Delaware and New Jersey have very onerous state death taxes. If you wanted to retire to
Rehoboth or Bethany or Cape May, those alone might cause you to rethink your decision," said
Frederick J. Tansill of the law firm of Verner, Liipfert, Bernhard, McPherson and Hand in Tysons
Corner.
In theory, several lawyers said, if you spend more than half the year living in one state, you can
reasonably expect to be treated as a resident of that state. But they and others cautioned that the
rules are not clear-cut, and you should make sure you take on the trappings -- "indicia," as lawyers
say -- of residence in the state you want to be in and eliminate them in other states.
If there is a lot of money involved, states may go to extraordinary lengths to rope you in.
"I've seen estate tax auditors at the state level go to the extent of checking out utility bills," said
attorney Rhonda J. Macdonald of Blankingship & Keith in Fairfax. "They'll go into more detail
than you might think because it's worth it to them."
Although a state has the right to levy estate taxes on real estate owned by nonresidents, other
types of assets are generally taxed in the state of residence. So if Virginia, say, can show you
actually lived there and not Florida, it can get a share of these other assets, Macdonald said. "If
Virginia can claim all those bank accounts and stocks and bonds, they are going to do that," she
said.
The worst case, said Tansill, is to have two states lay claim to your estate. Because the estate's
recourse is the state courts, if both rule in favor of the tax collectors the estate is out of luck. It's
"double taxation, and there's no relief," said Tansill. And even if the estate wins, it can burn up a lot
of money on lawyers and accountants. "Just avoiding the fight is worth something," he said.
Tansill noted that he had a client who owned an apartment building in Washington, a condo in
Rehoboth and a condo in Fort Lauderdale, and spent four months a year in each. "We were really
afraid we would have three states clamoring" after his estate when he died, Tansill said.
He said he advised his client to consolidate his holdings in one state, which he did, and there
ultimately was no problem with the estate.
The key to establishing domicile where you want it, for both income and estate taxes, experts said,
is making the transition to your new state real and complete. You can return to your former home
state to visit and you can continue to own property there, but you should join your new community
fully and completely.
"You've got to do all the routine things," Brennan said.
This means, among other things:
Spend more than half the year in your new state. That means at least 183 days, and several
experts recommend keeping utility bills and other evidence showing you were actually there.
Register to vote in your new state, and actually vote as much as you can. Inform the election board
in your previous state that you've moved and cancel your registration there.
Register your car in the new state and get a driver's license there.
Claim any homestead exemptions that may be offered by the new state. And if you are claiming
one here, such as the District's for homeowners, give it up.
Close your bank accounts here and open new ones in your new state. Transfer your brokerage
account, if you have one, to your new state. Change the address on mutual funds, dividend
payments and other investments.
Use your new address on all official documents that require an address. These include such things
as passport applications, tax returns, credit card applications, even hotel registers.
Move your family there. If you claim to live in Florida and your spouse and children are still here,
that's likely to raise the tax collector's eyebrows.
Some states, such as Florida, offer a "declaration of domicile," a special document you can file to
establish residence. See if your new state has one, and if so, file it.
Cancel club memberships or switch to nonresident status. If you are on the board of directors of
charities and other institutions, consider resigning.
Keep your stories straight. For example, don't tell the tax collectors in Richmond that you're a
resident of Florida at the same time that you're telling the University of Virginia in Charlottesville
that you're a Virginia resident and your child qualifies for in-state tuition.
In addition, said Macdonald, if you keep a house or other real estate in your former state, consider
putting it into a revocable trust. The state will still be able to tax it at your death, but property in
trust doesn't have to go through probate. If your will is probated in another state, nontrust property
is likely to have to go through an ancillary probate, which is a hassle.
