Moving during your career and in retirement both bring unique sets of nonfinancial and financial considerations. Planning ahead and a holistic approach informs sound decisions.
For many executives relocation is a fact of life, particularly as you advance to positions of increasing responsibility. Such moves, whether domestic or international, are often driven by corporate priorities, and they are typically company supported. At retirement the paradigm shifts to one of personal priorities.
Overlaying these dynamics are evolving state tax landscapes. Notably, the SALT Act was effectively repealed in 2017, resulting in a $10,000 cap on federal tax return deductions for state and local taxes paid. More recently, numerous states – following in New Jersey’s footsteps – are considering raising state income taxes on high earners. Such proposals are in some cases being propelled with urgency due to COVID-19-related budget holes, with affluent residents also concerned regarding the potential for the imposition or increase of state estate taxes. As we discuss below, while taxes are an important component of relocation considerations, there are no tax-free states, and we advise a holistic approach.
Indeed, whether you are considering relocating during your career or contemplating an ideal place to live in retirement, you will want to assess the full spectrum of lifestyle and financial considerations in order to make informed choices. If you have decided to move and that establishing domicile or residency is a sound decision, you will want to work with your advisors to facilitate a smooth transition.
How to Relocate During Your Career
For those making company-initiated moves, having a strong network of internal human resources advisors is invaluable – particularly in the case of those moving overseas for an assignment. For expatriates, country-specific legal and tax guidance is a must. A move across state lines also requires careful planning. While you will want to confer with your advisors, several fundamental considerations include:
Awareness of changes in the property interests and rights between spouses in the event you are moving from a common law state to a community property state
Determining whether changes of powers of attorney, wills and trusts are needed. Tax reporting and withholding should be reviewed and updated
Assessing property and casualty insurance coverages
For many, the greatest challenge is finding time to attend to these matters in the midst of moving family and taking on new professional responsibilities. The support of a capable team of advisors is essential.
How to Relocate in Retirement
As your career winds down and you plan your next phase, where to live is a decision that is best made by assessing the full spectrum of nonfinancial and financial factors.
Friends, family, relationships
Proximity to family and friends, or living in a location where family and friends are likely to visit, is a top priority for many. One common approach is to downsize the family home and improve a family vacation home for retirement living.
Climate and culture
As you are likely to have more time for recreation and socializing in retirement, weather and a strong cultural fit are important.
Increasingly, top-tier health care services are essential for an area to be considered a top-tier retirement destination.
Experts disagree about the extent to which taxes drive individual moves. Relationships, weather, culture, cost and quality of living, and health care all play a part. But taxes are certainly a factor.
When considering taxes, be thorough. Include an assessment of income, property, sales, gift and estate taxes.
Determine the all-in tax cost of living in one state compared to another. It is common to consider income and estate taxes and overlook property and sales taxes. But every state requires revenue to provide public services. There are no tax-free states.
Be mindful of the timing of the exercise of stock options and the long reach of state tax on deferred compensation. And be aware of the myriad of state trust income tax laws. If considering a move outside of the U.S., there are additional tax complexities. Confer with tax advisors well in advance of a move.
The following scenarios illustrate how the taxation of stock option income, deferred compensation and trusts can be affected by relocation.
Taxation of Option Income
Executive Jones spent his career residing and working in New York. Toward the end of his career, he received a stock option grant that vested over a two-year period. Subsequent to vesting, he retired, moved to Florida and exercised the option. The option income will be sourced to New York because state tax liability is determined by where Executive Jones worked from grant to vesting date.
Taxation of Deferred Compensation
Executive Williams spent her career residing and working in Connecticut. She deferred a portion of her salary and bonus each year into a non-qualified deferred compensation plan. She elected to have the deferred compensation plan paid out to her over a 10 year period following retirement. In years one through four of the distribution period she remained a Connecticut resident, and the distributions were taxed to her home state. In year five of the distribution period she moved to Florida. The balance of the distributions were treated as income of her new home state of Florida, which does not impose a state income tax. If Executive Williams had elected a distribution period of less than 10 years, the income would have been sourced to the state(s) in which she earned the income.
Taxation of Trusts
Executive Smith is winding up his career in Illinois and plans to relocate to Florida. He is also establishing irrevocable trusts for his children and grandchildren. If Executive Smith establishes irrevocable trusts while resident in Illinois, the trusts are likely to be considered resident in Illinois for Illinois state income tax purposes, even after Executive Smith moves to Florida. However, if Executive Smith waits and establishes irrevocable trusts after he moves to and becomes a resident of Florida, the trusts will not be Illinois resident trusts. Why would this matter? Illinois has a state income tax but Florida does not.
Establishing Domicile or Residency
Once you have made the decision to move, there are a number of steps to take to establish residence or domicile in a new state, particularly for tax purposes. The following list is representative, but not exhaustive. Seek legal and tax counsel familiar with the requirements of the old and new domicile.
Obtain a driver’s license in the new domicile
Register a vehicle in the new domicile
Register to vote in the new domicile
Review and update estate plan
Review and update property and casualty insurance
File federal tax returns using the new domicile address
File new state tax returns as a resident and former state tax returns as a non-resident (for any state income)
Reference new domicile in legal documents
Update mailing address for credit cards and account statements
Relocate collections and heirlooms to residence in the new domicile
Change address on passport
Affiliate with social and professional organizations in the new domicile
Consult with health care providers in the new domicile
Host family and social gatherings in the new domicile
Maintain a calendar of days in the new domicile
The freedom to move where you choose is liberating. There are many options. They key to a successful domicile decision, as is commonly the case with life decisions, is weighing the pros and the cons, making the best decision with the facts available, and knowing that as circumstances change, choices made may be revisited and reevaluated. Another move may be on the horizon.
Assess the full spectrum of pros and cons for relocation.
Remember that there are no tax-free states and that lifestyle, family and cultural factors should be given due consideration.
Work with your advisors to plan ahead.
The tax dynamics of relocating from state to state, let alone moving overseas, can be significant. If you plan on moving in 5, 10 or even 20 years, it is not too early to begin factoring the decision into your wealth planning.
Plan to establish domicile or residency.
If you have decided to move and that establishing domicile or residency in a new state is a sound decision, work with your advisors to ensure that you are equipped to take the necessary steps and avoid unpleasant surprises.