Married Couples Living in Different States Can Use a Trust to Reduce Income Taxes

Are taxes a reason not to live with your spouse? It may seem like an unusual estate planning strategy, but the benefits should not be underestimated. There are many legitimate reasons why married couples might live in different states and, whether by happenstance or design, tax planning could be one of them. 

Consider that states have varying tax regimes; some have high taxes and others have low taxes. For example, top earners in California are subject to a 13.3 percent state income tax, and that is in addition to a 37 percent top federal income tax bracket. In other words, wealthy Californians pay half of their income to the state treasury and Uncle Sam. Middle income earners do not fare much better, either. Individuals making $58,000 a year pay a 9.3 percent state income tax. In Florida, however, the state income tax is 0.0 percent. No matter how much you make you will not pay a dime in state income taxes in the Sunshine State. Why not use such discrepancies to your advantage? 

Let us share one creative solution: A spouse living in a high-tax state could gift intangible income producing assets to his or her spouse living in a low-tax state. Intangible assets are not physical in nature and include trademarks, copyrights, patents, literary works, broadcast rights, computer software, and lease and franchise agreements. Then, after a reasonable period of time, the low-tax state spouse would contribute the assets to a Qualified Terminable Interest Property trust, or “QTIP” trust, which is treated as a grantor trust. At this point, the income would be taxed to the lower-tax state resident and the QTIP trust’s distributions circle back to the spouse living in the high-tax state. 

The financial benefits could be enormous. Plus, QTIP trusts have other perks. A QTIP trust is a marital trust that can provide for your spouse after your death while also protecting your assets for future generations. They further offer flexibility for an estate’s personal representative to maximize federal estate tax savings after you pass away. 

We know this blog may raise more questions than it answers. We are here to help you create the right estate plan for your own needs and circumstances. For more information about creative tax savings solutions and QTIP trusts, do not wait to contact our estate planning attorney today.