Tax Planning: Should Wealthy Individuals Move?

FROM ONWALLSTREET.COM

"Location, location, location" the well-known real estate mantra, is a notion that advisors of high- and ultrahigh-net-worth clients might also want take to heart.

"Residency drives how much sophisticated wealth structuring and asset protection you can do," says Merrill Lynch advisor Adam Katz.

While the concept that it's better to live in low or no tax states isn't complicated, the strategies for advising and taking advantage of tax mitigation by location are anything but simple, say advisors.

"The bottom line is that it's really complicated, nuanced, and not a perfect one-size-fits-all," says Katz.

TOO TAXING?

"The first thing everyone wants is to be in a zero percent income tax state for tax purposes," says Lisa Featherngill, managing director of wealth planning at Wells Fargo's Abbot Downing group. "But the most important thing is whether or not it makes sense for the client."

For example, if a client changes residence to Florida, a no income tax state, that can mean a 10% savings, she says, but that also means the client has to spend at least half the year there. If the client can't or doesn't want to spend enough time in another state to be a legal resident for tax purposes, the savings won't be worth the disruption.

And while Florida has no estate or inheritance tax, says Featherngill, the state is known for its heavy probate fees, so advisors may suggest setting up revocable trusts.

RELOCATION

The most aggravating disruptions in residence changes can be meeting and proving state requirements, especially where clients divide their time between several states, which have different rules. Advisors recommend working closely with experienced accountants and tax lawyers because clients will have to change more than their mailing addresses – sometimes they will have to provide detailed accounting to the state, which can also ask for bank, credit card and phone records to establish whether an individual has community connections and financial relationships in the state.

Featherngill has even seen concern about the location of an advisor entering the picture. "We've seen people changing advisor relationships to find an advisor in the new state," she says. "Maybe the advisor should move with them, if it’s a significant enough client." But she adds that it might be just as effective if the advisor makes sure to travel to the client’s new home state for in-person talks, as opposed to having meetings in the client’s previous state.

TRUST STRATEGIES

Setting up a trust in another state can sometimes benefit HNW clients without any need to change residency. More than a dozen states allow self-settled trusts, which offer creditor and estate tax protection.

Some states, like Delaware, have no income tax on trusts, so there may be opportunities for tax mitigation for clients without a need to move, says Katz, vice president of Merrill's Bodner Sax Group in New York.

"It’s very nuanced and complicated stuff, but definitely something to think about," he says.

For example, a Delaware incomplete non-grantor trust, or ING, allows the resident of a high-tax state to re-domicile ownership of a business to Delaware, where the owner still has full control and assets without home state tax liability.

Katz points out that New York disallowed its residents from taking state tax advantages of INGs, but that New Jersey still permits them.

"There’s a lot of complexity to where you spend your time and where your business makes money," says Katz. Advisors need to work closely with tax experts and lawyers to make sure that no one is blindsided.

"You don’t try to guess about the way it works," he says.

'DECISION TREE'

In fact, any time he thinks about setting up an ING trust, he makes sure that his team goes to the IRS to get pre-approval. "It costs money, not only to have the IRS review it, but to have an attorney provide and document all the moving parts of that ING trust," Katz says.

Despite the added costs, Katz says that he has frequent discussions with the wealthy entrepreneurs he advises about such approaches, bringing in other experts and making sure his clients understand "the decision tree".

"It’s definitely an upfront investment of time and money," he says. "It doesn’t mean it’s not worth it, but it definitely adds complexity to your life.