When it comes to estate planning, creative customized strategies often yield optimal returns. One such strategy applies to married couples and considers the question: Are taxes a reason not to live with your spouse? It may seem absurd but consider the benefits.
For married couples living in different states, or married couples willing to move to separate states, certain steps can be taken to maximize tax savings and provide added tax-avoidance flexibility after both you and your spouse pass away. The plan takes varying state tax regimes into account and involves a “QTIP” trust.
It is no secret that states have different income and estate tax rates. New York, California, Oregon, Minnesota, and New Jersey all have income tax rates near or above 9 percent. Even Californians making $58,000 a year pay 9.3 percent in state income tax. On the other hand, Indiana, North Dakota and Pennsylvania have income tax rates near or below 3 percent, and another seven states have no income tax at all. Why not use these differences to your advantage?
If a married couple resides in a high-tax state, then one spouse could move to a low-tax state and pay fewer taxes on their earned income. That much is easily understood. Now consider that the high-tax state spouse could gift the couples’ income-producing intangible assets (if applicable) to the spouse newly living in the low-tax state. After a reasonable period of time passes, the low-tax state spouse could direct the intangible assets to a Qualified Terminable Interest Property trust, or QTIP trust. The trust would then proceed as a grantor trust and make financial distributions back to the spouse living in the high-tax state, but the distributions would be taxed at the lower state tax rate.
Essentially, the strategy involves a circular asset pattern that reduces taxes and employs the traditional benefits of a trust, as well as other benefits unique to QTIP trusts. For example, a QTIP trust is specially designed for married couples and provides for a surviving spouse while protecting assets for future generations. They also offer flexibility for estate executors or personal representatives to maximize federal estate tax savings.
We know this article may raise more questions than it answers. This is a complicated topic but it can be extremely advantageous for you and your family. We encourage you to contact us now, or at any point in the future, so we can discuss creative estate planning solutions and whether QTIP trusts are right for you.