Sweeping vistas and proximity to fellow rich and famous folks are some reasons why billionaires live where they do, and now a new study says estate taxes are a pretty important factor as well.
Billionaires tend to move out of states with estate taxes, according to researchers at the University of California, Berkeley and the Federal Reserve Bank of San Francisco. The trend grows stronger as billionaires grow older, they said.
Monday’s study is a peek into the many ways the rich minimize taxes and transfer wealth to the next generation. But it’s also a reminder that the less-than-filthy-rich can also avoid and minimize estate tax hits — without pulling up stakes and moving elsewhere.
The federal government and state governments use estate taxes to tax the transfer of wealth and property from the deceased to their heirs.
Twenty-nine states have no estate tax, the study said. The federal estate tax of 40% kicks in for estates valued at $11.4 million for an individual and $22.8 million for a married couple.
Until 2001, the federal government issued a tax credit to taxpayers that covered state-level estate taxes. “In effect, the federal government picked up the tab for taxpayers,” the study said. Tax cuts during under the Bush administration repealed the credit.
Researchers looked at what happened once that federal tax credit went away:
• In 2010, one in five billionaires that once lived in an estate-tax state moved to a state that didn’t have the tax.
• Almost 43% of billionaires 65 and older originally in an estate-tax state moved to a state without the laws.
• How much money is at stake for the filthy rich? A billionaire’s death resulted, on average, in a $165 million influx in state estate revenues.
Though the research showed billionaires moving away from states with estate taxes, the researchers said many states still benefitted from having an estate law on the books, given the money that could come into the coffers.
If Washington state resident Jeff Bezos, CEO and found of Amazon AMZN, -1.09%, passed away, researchers estimated his estate would get hit with a $11.97 billion estate-tax bill. Bezos is the world’s richest man, worth an estimated $110 billion, according to the Bloomberg Billionaires Index.
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Here are some strategies for everyone else to consider.
Pass on increasingly valuable assets, without the tax
Though capital gains taxes can take a cut of an asset with increasing value, like the sale of stock, tax laws also include what’s called the “step-up in basis.” That means an asset resets in value for tax purposes once it’s given to an heir. When the value is readjusted, appreciation rates are smaller and so are any capital gains taxes upon sale.
“Anything you own that appreciates in value is generally going to be subject to the step-up in basis benefit,” said William Dendy, president of Elite Financial Management, which has various offices in Texas. That could include anything from stock to land to baseball cards, he noted.
Remember charitable contributions
As the study notes, the charitable donations specified in a will are not taxed. “Estates worth $20 million or more deducted 24% of their taxable wealth,” researchers said. Smaller-sized estates can also shave down their taxable size through donations, Repak noted.
Remember the gift
Michael Repak, vice president, senior estate planner with Janney Montgomery Scott in the Philadelphia area, said people seeking to minimize state-level estate bills should think about gifting non- or lower appreciating assets while they are living.
An heir wouldn’t avoid many, if any, capitals gains taxes because the value doesn’t grow as much over time, he said. So it’s best to distribute these kinds of assets before they are valued in the estate and subject to a tax bill. These assets can include cash and bonds, Repak said.
Other experts note that individuals can give a maximum $15,000 every year in gifts ($30,000 for couple) without using up any of the federal gift and estate exemption amounts. It’s an unlimited amount if the gift goes directly towards a recipient’s college tuition or their medical expenses.