Estate Planning for Snowbirds Who Have Homes in Multiple States
Tom Dove and Nancy Turtle married, made their home in Minnesota and raised children. As time went on, they grew tired of the long winters and began to dream of warmer climates. After their children graduated from college, Tom and Nancy purchased a condo in Arizona. Thus, the Doves became snowbirds.
Regardless of whether they keep their house in Minnesota or moved to Arizona or somewhere else, the Doves’ acquisition of a residence in another state raises a variety of estate-planning issues – and some opportunities.
Which state is now their domicile?
The answer may depend on a number of facts, such as the relative amount of time the Doves spend in each state, the location of their employment, where they vote, etc. The Minnesota Rules enumerate no fewer than 26 different factors relevant to the question.
If the Doves change their domicile to Arizona, can they avoid estate tax?
Minnesota has an estate tax, Arizona does not. Estate tax liability in Minnesota is a function of assets owned in the state, not necessarily place of domicile. Domicile in Arizona would allow the Doves to claim their intangible assets (e.g., brokerage accounts) are located outside of Minnesota. Minnesota-based real estate and tangible property, however, will be included in their estate tax calculation.
Of course, the Doves may need to consider federal estate taxes as well, but the federal estate tax exemption is $12.92 million per person for 2023, and unused federal exemption is portable to the surviving spouse (Minnesota’s exemption is not).
Are there other tax considerations from domicile in Arizona that might factor into the estate planning process?
Yes. Capital gains can be a significant concern. Capital gains are measured by the difference between basis (e.g., what you originally paid for an asset) and its fair market value at the time it’s sold.
When a person dies in Minnesota (a “common law” jurisdiction), property held jointly with a surviving spouse receives a half-step-up in basis. That is, the decedent’s share is “stepped up” to fair market value on the date of death. So, if Tom dies and Nancy immediately sells jointly-held stock, she will be taxed for the capital gains on her half of these assets.
By contrast, Arizona is a “community property” jurisdiction. Under federal tax law, community property receives a full step-up in basis when the first spouse dies. Thus, in the example above, if Nancy sells jointly-held stock as an Arizona domiciliary, she is deemed to have no capital gains. The distinction between capital gains treatment in the two jurisdictions provides opportunities for tax planning.
If one or both Doves die, how will their property be distributed?
Each state’s government – common law in Minnesota and community property in Arizona – provides its own rules as to (1) whether the law may override provisions of a will, and (2) how property gets distributed if someone dies without a will.
For example, Minnesota statutes protect spouses from total disinheritance by (among other things) allowing the surviving spouse to elect a percentage of the decedent’s “augmented estate” – regardless of any contrary provisions in the decedent’s will.
By contrast, community property rules – such as those in Arizona – generally hold that each spouse owns an undivided one-half interest in property acquired during marriage, unless the property was acquired through a gift or an inheritance. The surviving spouse thus is considered the owner of one-half of community property regardless of how the property is titled and regardless of the deceased spouse’s will.
Do the Doves have additional concerns about probating their assets in two states?
Yes. Without estate planning techniques such as trusts or transfer-on-death deeds, there’s a good chance that at least one of the Doves’ estates will require probate proceedings in every state in which they hold real estate.
There’s a lot to know. Estate planning for clients moving from state to state can prove complicated no matter which states are involved. The distinctions between common law and community property arise more frequently than you might expect. Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Wisconsin are among the states that recognize some forms of community property. Numerous foreign countries do as well. Whether the Doves migrate near or far, they should keep their friendly estate planner in mind.
This story ends, however, with the Doves returning home from Arizona. They enjoyed lots of golf and watching their skin turn leathery in the sun. But their kids in the Twin Cities are now raising broods of their own. Spending time with their extended family in Minnesota turns out to be one of the great joys of Tom and Nancy’s later years. Gazing out at the window at their pear tree resting quietly in the snow, a rare gray partridge alighting on a slender branch, the two Doves both conclude: There’s no better place to spend the holidays than in the Northland!
Contact us today if you have questions about this topic or if we can assist you with your Estate Planning needs.