A number of Americans will be relocating in the coming decades in order to pursue their retirement dreams or simply to make retirement possible. Non-financial issues, such as closeness to family members and good jobs and climate and access to services such as health care are the most important considerations when opting to relocate for retirement. There are also a number of financial issues that should be considered. Consider impact on property rights

State property rights vary from state to state. This issue is particularly important for married couples. Most states are common law or separate property states (42 states are common law states). Generally, in common law states married couples are deemed to own 100% of all property that they acquired before or after marriage.

Other states are community property states (Texas, New Mexico, Arizona, California, Washington, Idaho, Alaska and Wisconsin have some form of community property laws). Generally, in community property states married couples are deemed to own 100% of their separate property (i.e., property acquired before marriage or after marriage if acquired by gift or inheritance) and each is deemed to own 50% of community property (i.e., property acquired during marriage that is not separate property).

Most states will respect the property classification for persons who relocated; however, relocating can still pose a number of surprises. For example, moving from a common law state to a community property state may cause problems for persons who are funding an irrevocable life insurance trust or ILIT Specifically the problem is that payments made by one spouse to the trust to cover the insurance costs very well may have been paid by wages earned by the spouse from his or her employment, which is considered community property. Thus the insurance award may be deemed owned 50% by each spouse and the assets will not be excluded from estate taxes when the first spouse dies – which is the whole purpose of creating an ILIT.

Married couples may also find that they moved to a state where inheritances are treated as marital property, meaning that the inheritance can be subject to division in a divorce proceeding. For example in Oregon inheritances received during marriage are presumed to be marital property and subject to division by the divorce courts. This could result in unfortunate situations where one spouse inherits a large sum of money after moving to Oregon, only to find out that they put themselves in a position where their spouse can take one half of the inheritance.

Consider impact on right to dispose of property

State law also controls the right of an individual to dispose of his or her property and relocating can produce a number of surprises. For example, Louisiana has a forced heir law. This law basically prevents persons from leaving their property to persons other than who they set out in their will or estate plans (the law provides that up to 50% of a persons property may have to go to their heirs, regardless of what the person’s will says). State law also varies as to whether one can disinherit a living parent if the person has no living children. A number of states do specifically allow one to disinherit their parents, but to do so they must specifically spell out the disinheritance in their will (as is the case in Texas).

Consider state tax differentials

State income and other tax differentials are the most often cited financial issue with regard to relocating for retirement. Most of this attention focuses on the distinction between states that impose a state income tax (41 states impose such a tax, such as Colorado) and those that do not (such as Texas). Unfortunately this focus does not present the whole picture. The reality is that states collect revenues from a number of sources, with ad valorem or property taxes often being one of the most onerous taxes on retirees. Thus, even though a state does not have an income tax, the overall state tax burden may actually be higher in that state.

State tax laws also present a number of surprises, such as whether military and disability benefits are subject to tax, whether retirement benefits are subject to tax, and whether the federal income tax is deductible for state income tax purposes.

If that is not complicated enough, one has to factor in state estate, gift and generation skipping taxes. A number of states no longer impose estate or transfer taxes. Other states still impose a tax but provide a minimal exemption amount. Other states impose a tax but provide an ample exemption amount. Many of the states that no longer impose estate taxes will likely impose an estate tax once again once Congress acts or fails to act to change our federal estate tax laws.

While the non-financial issues are much more important in deciding where to relocate, there are some financial issues that should be considered. Given the local nature of these issues, it is imperative that retirees speak to advisors in each jurisdiction to determine if the jurisdiction presents any unexpected surprises that are not acceptable to the retiree.

By: Kreig Mitchell
Law Office of Kreig Mitchell
1942 Broadway, Suite 314
Boulder, CO 80302
Ph. 303.521.0053
http://www.coloradotrustattorney.com