The Best States to Live In for Lower Taxes and Asset Protection

Speaker 1 – 00:00
Which states are most effective to minimize taxes and also protect your assets.
Speaker 2 – 00:05
Residencies, where you’re spending generally 183 days out of the year. Domicile is where you intend to be long
term. It’s more so looking at the estate flow later in life.
Speaker 1 – 00:18
That would be important. If you are looking to have a residence in state for income tax purpose, but then you plan
to die in another state for certain inheritance or estate tax reasons, that would be where you don’t intend to
domicile on the state level.
Speaker 2 – 00:32
States could either have estate tax, inheritance tax or some have both. The difference is estate, the estate pays it.
Inheritance tax, the recipient of the inheritance pays it.
Speaker 1 – 00:41
There’s a lot of things to consider as far as taxes from an income level estate, inheritance level, corporation level,
asset protection and legal implications, all of those things. This is not a one size fits all.
Speaker 2 – 00:55
That’s where the rate estate structure, if you have kids, lifetime gifting, like all this kind of stuff can really save a lot
of money in the long run.
Speaker 1 – 01:02
Meeting Title: March EP3 Ideal States to domicile
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If you’re trying to build a defensible checklist to document this and domicile somewhere, what would be on that list
to do? Every state has a different tax regime and asset protection laws. So today we’re going to do a deep dive on
which states are most effective to minimize taxes and also protect your assets. Joined today by Chris Pavcik,
another strategist on our team. And we’re going to do a deep dive on which states are effective to domicile. And
this has become a common question that we’ve seen really in two areas. Number one, business owners or
founders after they have an exit and they’re kind of in a new stage of life and looking at what states they may want
to live in, whether it’s permanently or have a second residence in.
Speaker 1 – 01:52
And then also people that are entering retirement income comes into play, retirement income taxes, state taxes, et
cetera. So we’re going to do a deep dive. But Chris, why don’t you start? What is the. What’s the difference between
a domicile and a residence?
Speaker 2 – 02:06
Yeah, so those are often used interchangeably. Residencies where you know you’re spending generally 183 days
out of the year at like physically. And nowadays with tech, it’s more and more easy to track this if you’re just saying
that you’re a resident somewhere but you’re not actually spending the time. They can see where, you know, with
your digital footprint now, like where you actually are as far as spending all sorts of different factors. But domicile
is where you intend to be long term. It’s more so looking at the estate flow later in life. Like what inheritance laws,
what estate laws on the state level would apply.
Speaker 1 – 02:47
So I guess that would be important if you are looking to have a residence in state for income tax purpose, but then
you I guess plan to die in another state for certain inheritance or estate tax reasons. That would be where you don’t
intend to domicile, is that correct?
Speaker 2 – 03:03
Yeah. Where you intend to remain indefinitely is more domicile.
Speaker 1 – 03:07
So why we thought this would be a timely topic is we find this clients in, prospective clients ask this question all
the time, especially after a liquidity event or pre liquidity event. And they’re looking at what states to essentially
maximize taxes. Because there’s a big movement in the country right now, specifically with California and New
York. And this has been going on since like since COVID I guess really when you know, during COVID when people
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were starting to work more remote, they were like, well why would I live in New York? We’ll use New York for
example, because there’s been a big shift from like New York to South Florida. Why do I live in New York and pay
these high income tax rates when I can move to a state?
Speaker 1 – 03:50
Warm weather obviously too and pay no state income tax when I’m working remote. So it’s a big shift right now
moving out of California, New York, as far as well as some other states into, you know, lower income tax date. So
let’s start with the, the low hanging fruit, low income like states that have no income tax. So Chris, why don’t you
give an overview of like state taxes, what that applies to, why that’s important.
Speaker 2 – 04:18
Every, every state’s different. So here in PA it’s a flat 3.07% tax. But then some states like New York have a
graduated tax table like the federal state tax or like the federal income tax works. So it really just depends on
where you’re at. And like you said a lot of.
Speaker 1 – 04:34
States, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming.
Speaker 2 – 04:41
Yeah. So those have no state income tax. A lot of times they make up with it like in sales tax like other areas. So
it’s not exactly like zero but most of the time earned incomes, the bigger picture, you know, the biggest ticket item.
Speaker 1 – 04:58
So there’s federal taxes which you’ll pay anywhere. That’s a different rate. Then there’s state tax and self
employment taxes. We’ll say that’s a federal tax State taxes, which then you pay on income at your state rate. Then
there’s local taxes. A lot of these no income tax states also don’t have local taxes, which can be a significant
savings. So federal taxes is one thing, and then state taxes. So, yeah, there’s nine states that don’t have. Don’t have
any state taxes. Like you mentioned, there’s a sales tax generally added back in. But let’s go through these nine
states. So just without getting too detailed here, like Wyoming, sales tax is 5.56. South Dakota 6.1. Alaska, 1.76.
New Hampshire, none. Florida, 7. Nevada is a little over 8. Texas, a little over 8. Tennessee, a little over 9.
Washington, a little over 9 1/2.
Speaker 1 – 05:53
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So I guess if you think about it, you’re going to be the sales tax. Let’s just use an example. If you’re making $1
million a year, you know, that would all be taxed at state income rates, which we’ll say in Pennsylvania is 3, you
know, with 3.7, so that’s 30,000 a year. If you’re making a million, you’re probably, I don’t know, let’s say you’re
spending 300,000 a year. And so that would be an easy way to look at, like, is the state tax worth the sales tax? So,
like, you know, if you’re leaving Pennsylvania, where you’d pay $30,000 on all of your income, roughly, and you’re
going to move to, let’s say, Texas, and you’re spending $300,000, Texas sales tax is 8.2%. So that’d be what, 25,
24,000.
Speaker 2 – 06:41
Yeah. And one thing to point out, that’s like the average. Different things are taxed.
Speaker 1 – 06:45
That’s right.
Speaker 2 – 06:46
Yeah, but. Yeah, I just want to note that. But looking at the income tax versus what the actual sales tax would be,
one way to start, I think so.
Speaker 1 – 06:56
That’d be like income spending is one thing, but the bigger thing would be if you’re going to plan around, if you
have a liquidation event, this could be like, you can’t just like move states and then the business sells the next day.
They just won’t fly. But this could be a significant savings if you can do this 2412 to 24 months in advance. Let’s
say you’re selling a business for $100 million. Just use round math. Obviously, there’s a lot of calculations here
with basis, et cetera, but round numbers. You know, if you’re in a state where there’s zero state income tax that
whole transaction could be taxes. You know, you get zero taxes in a state, but then if you’re in a state that will just
use what’s the top end of California’s 12% in state tax.
Speaker 1 – 07:45
So you know that could be like on $100 million transaction. I mean you’re 13. Okay, so you’re looking at $13 million
difference. So yeah, income and sales tax one thing. But the bigger tax would be if there’s like a big liquidity event.
Speaker 2 – 08:01
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Yeah. Your point about doing it the day before, like you touched briefly about like some of these states trying to
claw it back. Like there’s some aggressive cases.
Speaker 1 – 08:12
California and New York are from. From what, from our experience in research, they’re the most aggressive right
now. So there’s like a long list of things that are. It’s ideal to do before you do this and you do reclaim your resident
or redecide your domicile, things like change your driver’s license where you’re registered to vote, do that list.
Speaker 2 – 08:42
That’s what I was going to mention kind of going back on the residency versus domicile. Like domicile is all that
stuff that you’re talking about. Like where’s your, what kind of driver’s license do you have? Where are you voting?
Like all that kind of stuff. So there’s been cases where like to your point about New York and California trying to
claim that you know that’s not the key. Like they’ll fight that a little bit harder than other states.
Speaker 1 – 09:04
And from our experience and research, like it’s not a matter of if you’re a high net worth or ultra high net worth
individual. You’re most likely those states specifically it’s a high chance that you get audited or looked at if you’re
leaving with a lot of assets. So having that buttoned up to basically have a defensible documentation of like hey, I
did these things well in advance to be able to prove this. And what’s the checklist is 183 days.
Speaker 2 – 09:38
That’s typically. Yeah, 183 for residency.
Speaker 1 – 09:41
What we find common is like and like you said, the digital footprint is pretty easy. I mean your iPhone tracks are a
hundred apps or chat or if you don’t go in and Change the settings, 100 apps are tracking your location 24 7. So it’d
be pretty easy for you know, anybody to get that. But essentially if you. We found having like time logs and audit
logs is the best way to go. So tracking your flights, your Travel your days spent in certain areas. That’s usually the
most effective way, right?
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Speaker 2 – 10:15
Yeah, even like, even if you swipe a card, right?
Speaker 1 – 10:17
Yeah, that’s all tracked.
Speaker 2 – 10:18
So yeah, they’re getting better at catching this kind of stuff. So.
Speaker 1 – 10:23
So that’s one thing is state income tax, which is important and then the next thing let’s highlight is. Well actually
before we get in, I want to talk about like the inheritance and estate tax, which is relevant. But let’s just on the along
the lines of state tax, I grouped these into three groups. So essentially we talked about the tax free, income tax
free. The second tier would be lower tax rates that are favorable and these are like trending that people are moving
to North Carolina, Arizona, Indiana, Ohio, Utah, Colorado, Georgia, Idaho. These are all somewhere around 3 to 5%
ish tax rates and then moderate to tax neutral. Michigan, Pennsylvania, Missouri, Kentucky, Iowa, Oklahoma,
Mississippi, Louisiana, these are right around that like flat 3 to 4%. It’s like Pennsylvania, like we said is 3.07.
Speaker 1 – 11:25
And then the high tax states, bigger group, these are states like California, New York, New Jersey, Connecticut,
Massachusetts, Minnesota, Oregon, Hawaii, Vermont, Maryland, Illinois. So just kind of gives an idea of three
categories of state or four categories I guess of state income tax. Let’s go to the inheritance and estate tax now.
So Chris, why don’t you walk through. So there’s a federal estate tax within with a credit and then talk through how
the states work.
Speaker 2 – 11:56
Yeah, on the federal side, that’s the most severe one. If you’re over the current exemption amount right now
Everybody gets a $15 million credit that basically shields your estate, which includes everything in your name,
business ownership, investment accounts, life insurance, death benefit, all of that lumps into your estate. And if it’s
under 15 million, generally you’re good. If you’re married, that’s double. But if you’re over it’s a 40% flat tax. On the
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state level, states could either have estate tax, inheritance tax or some have both. The difference is estate, the
estate pays it, inheritance tax, the recipient of the inheritance pays it. So we can go on to the states that are, you
know, that vary there.
Speaker 1 – 12:37
But yeah, let’s. So why don’t you give an example of Pennsylvania? This is where we’re at.
Speaker 2 – 12:42
Yeah, pa, they do impose an inheritance tax, not an estate tax. And it depends on who is receiving it. So in pa,
inheritance between spouses is tax free. If it’s going to children, like direct children, it’s four and a half percent.
Siblings, it’s 12%. Anybody else it’s 15%. So if you have an idea of where you want your stuff to go, that’s very
relevant between kids getting it, siblings, anybody else, charity’s tax free.
Speaker 1 – 13:14
And then so let’s start with the estate tax. There are a few states that have that. So Connecticut, Washington, D.C.
hawaii, Illinois, Maine, Maryland, Massachusetts, Minnesota, New York, Oregon, Rhode Island, Vermont,
Washington. There’s an estate tax there. They vary some. All these states have some sort of exemption, just like
the federal. Federal taxes and then states with an inheritance tax. These are Kentucky, Maryland, Nebraska, New
Jersey, Pennsylvania. And this is a wide variety of this kind of all over the map. So it is important to like look at
state by state specific where you want to move to. But I would say in general, good way to frame it is like the states
that have no income tax in general are more favorable. They kind of coincide with the inheritance tax and estate
tax.
Speaker 1 – 14:15
But let’s give an example what is just used like California or New York.
Speaker 2 – 14:20
New York’s tricky because there’s a cliff. They have an exemption of 7.16 million and there’s a graded tax rate too.
So anywhere from 3.06 to 16, where it gets a little bit trickier is there’s a cliff. So if the estate is 105% of that
exemption. So 105% of 7.16 million. I don’t know if you can do the quick mental math on that, but 105% of 7.16
million.
Speaker 1 – 14:49
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Seven and a half.
Speaker 2 – 14:50
Ish. Yeah, around that. So if that’s the case, the entire state is taxed, but then there’s rates that from 3 to 16,
depending on where you fall.
Speaker 1 – 14:59
Okay. And then this is important too, where you own property matters. So if you successfully change your domicile
to estate with no estate tax, if you own property in a state that does have an estate tax, that property can still be
subject to the situs’s estate tax. So let’s say you move to. You move to Florida. Yeah. You have a house in New York
and you die. The New York house would still get hit with the New York inheritance tie, but then your other assets
would flow through Florida.
Speaker 2 – 15:40
Yeah. So that’s where the right estate structure. If you have kids lifetime gifting, like all this kind of stuff can really
save a lot of money.
Speaker 1 – 15:48
What would be. Let’s think through. So what would be a strategy in that situation? Gift the house to kids,
irrevocable trust, a Q pert things to target that specific asset, because that could be a big savings I mean if you
have a few $5 million house 10. You know what was that 10 12. What was the percentage for New York?
Speaker 2 – 16:14
Anywhere from 3 to 16.
Speaker 1 – 16:15
Yeah. So you could be, I mean that’s a significant tax savings just on that.
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Speaker 2 – 16:20
Yeah. California is actually none. So no estate or inheritance.
Speaker 1 – 16:24
But yeah. So again these are all state by state specific. Good to do your homework and then we’ll hit on really
quickly is just like business taxes. So if an LLC taxed as an S corp or a partnership flows or sole prop. Flows
through to the owner’s personal tax return. So then there is no corporate tax and it doesn’t really matter. But if you
have a C corps are taxed at their own the entity tax rate. So just to give you an example, you have a C corp say
profits are $10 million. You’re going to pay yourself a W2 for working in the business, whatever it is. If the profits of
10 million stay inside of the C corp and don’t get distributed, they’re taxed at their tax rate. And then there’s also a
state corporate tax rate as well.
Speaker 1 – 17:16
So federal corporate tax is 21%. So in that situation you could be more effective to pay that tax rate versus 37% if
it’s distributed to you as an individual. But then the state taxes, states have corporate tax rates as well. So like New
Jersey is 11 and a half percent. Pennsylvan is 7 and a half. So you would pay that on top of that federal corporate
tax rate. So that can matter too where you want to have your business. Depending on the entity structure of what
state you want to domiciled in. That could be important. Obviously you have to be able to back it up. Like I know
someone that moved the business to Florida from Pennsylvania, has a house in Florida, he’s a resident domicile in
Florida, lives there more than six months of the year. So could be something useful.
Speaker 1 – 18:08
But you obviously would have to move the whole business. And then outside of that, Chris, why don’t you do hit on
the retirement income tax.
Speaker 2 – 18:18
Yeah. This is another state specific. All depends on where you’re at. Yeah. So the ones that have no state income
tax, the nine states that you mentioned, Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas,
Washington and Wyoming, those are all exempt too for retirees. So those are all zero. There’s four states that have
income tax but exempt retirement income. So those are Illinois, Iowa if you’re over 55, Mississippi and
Pennsylvania.
Speaker 1 – 18:52
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So let’s give an example. If you’re retired and you’re taking money out of an ira, you’re going to pay federal taxes. In
Pennsylvania there’s no state tax. So that’s different than if you have earned income. Like if you’re working, you
know, you’d pay that 3.07 in Pennsylvania you would not pay any tax on the IRA distribution.
Speaker 2 – 19:11
And there’s some states that they tax retirement, but they don’t or they have exemptions for Social Security. Like
for example in Connecticut there’s a partial exemption if your AGI is, you know, at a certain level. So it’s all state
specific and definitely want to research it and make sure if you’re looking to make a move that you have these
details. But yeah, each state’s different.
Speaker 1 – 19:37
Yeah. And then let’s hit on this is something that high net worth, ultra high net worth families ask about and
concern about is asset protection and trust situs. So the trust citus is an interesting one because you can domicile
your trust in a different state that you live in. So like a common structure is Nevada. Nevada. So this would be if
you’re looking for like a domestic asset protection trust or for whatever reason you wanted, you know, you can
have it. Different states govern your trust. So like Nevada for example, they have. And we don’t need to get, there’s
a lot of like nuances to this so we don’t need to get too far into the weeds. But Nevada for example, like they have
favorable trust law and asset protection laws if assets are owned by a trust in that state.
Speaker 1 – 20:33
So this would be, you know, if you’re really concerned with asset protection. There’s a lot of caveats here. Like you
know, could have to give up control the assets to a trustee. Lot of things to consider. But looking at what state you
want to have the trust Donna’s out in is something to think about too. And as well as your llc, that could be a whole
nother podcast. Like states to have an llc. And Delaware has been a common one. I would also think about from
an asset protection standpoint, some states are more favorable to, are more business friendly versus like Florida,
Texas for example, they’re known as being like in Delaware too. That’s why a lot of LLCs run through Delaware.
They’re very business friendly as far as lawsuits, litigation, et cetera.
Speaker 1 – 21:23
So that could be another thing to consider is where do we want to protect, you know, where we have the most
favorable state to protect our assets Depending on, you know, obviously if you’re wealthier, you’re more likely that
someone would sue you. But also depends on like, you know, what industry you’re in, if you are at a higher risk. But
anything to add there? No, I think the last thing and you hit on this at the beginning a little bit. But what would, what
tips would you have for, you know, if you’re trying to build a defensible checklist to document this and domicile
somewhere, like what would you, what would be on that list to do?
Speaker 2 – 22:00
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Yeah, so checklist where you’re located for the primary residence, which state? If you have multiple properties in
different states, just looking at which one’s most friendly to you, obviously time. Where are you going to be
spending the bulk of your time? At which state business, if you own one, where is that going to be domiciled in? I
know you just spent some time talking through that and then beyond that just looking at the other extracurricular
stuff like where is it reasonable to actually like where you’re thinking about spending your time, like is your family.
There is stuff you like to do there, like those kind of things, like you’re actually putting the time into like not just
doing it for tax reasons, but also making sure it aligns with the lifestyle you want to live ultimately.
Speaker 1 – 22:41
Think about it, if you got audited and you got looked at as to like, you have to be able to prove that’s where you’re
spending majority of your time and you have as much defensibility as you can. So this has been a topic that is
becoming more and more common as people are migrating out of certain states as well as planning around
liquidity events and where to retire. So there’s a lot of things to consider as far as taxes from an income level,
estate, inheritance level, corporation level, asset protection and legal implications, all of those things. This is not a
one size fits all. There’s also the weather is a factor, where your family is, your friends, political reasons, people
move states. So there’s a number of reasons why you would want to look to move. There’s no one size fits all.
Speaker 1 – 23:36
There’s a million things to consider. But you know, do your research, think through, you know, where you want to
actually live from a lifestyle standpoint and don’t let the tax or legal tale lead the, you know, lead where you’re going
to be, live somewhere because you want to live and then also make it, make sure you’re doing it as tax efficiently
as possible.