Benefits and Considerations

Top Financial Considerations for Your New Life in Idaho

Idaho combines a quality lifestyle, reasonable cost of living, and a favorable tax environment. It is no surprise that Idaho has become one of the most popular states to call home. If you recently moved to Idaho, you should review these aspects of your financial life with your advisor:

Domicile – your state of residence. Each state has rules to determine when you become a resident of the state. In general, the rules focus on where your physical residence is located and how much time you spend in the state. Based on the timing of your move, you may need to file tax returns in both Idaho and your former state. Also, if you have income producing property (i.e. rental property) in your former state, you may need to continue filing a tax return in your former state.

Income taxes. It is best to review your tax status as soon as possible to avoid any unpleasant surprises at tax time. States have different income tax rates and different views on what income should be taxed. Will your taxes go up? Go down? Do you have income producing property in your former state? Will you be taxed in both states? If you answer these types of questions early, you have time to plan for the best result.

Estate or Inheritance taxes. Estate or inheritance taxes refer to the tax you or your heirs pay at the time of your death. The tax is generally a percentage of the assets you owned at the time of your death. You may be most familiar with the Federal estate tax – a tax by the Federal government no matter what state you live in. For 2021, the Federal estate tax affects only those with assets over $11.58 million ($23.16 million for a married couple). In addition to the Federal estate tax, twelve (12) states and the District of Columbia impose an estate tax, and six (6) states have an inheritance tax.

At the time this article was written, Idaho does not have an estate or inheritance tax. That is good news if you are moving out of a state with an estate tax. Even though Idaho does not have an estate tax, you should still review your estate plan to determine whether your Will or Trust needs to be updated. You may have provisions in your Will or Trust relating to estate tax that are no longer needed. Or, if you have real property in a state other than Idaho, you may need to review the impact of estate tax in those states. Some states will still assess estate tax if you own real estate in their state.

To minimize the impact of estate tax, early planning is essential.

Estate planning documents. Although state laws are similar, there can be significant differences among states for the laws governing documents like Wills, Trusts, Powers of Attorney and Medical Directives. You should make sure your documents are in full compliance with Idaho law. The following paragraphs highlight some examples of how states differ and what you should review in your plan.

  • Wills and Trusts. Your Will or Trust will be honored in Idaho. The specific laws governing how Wills and Trusts operate in Idaho may differ from your previous state. It is best to have an attorney review your Will or Trust to avoid any conflicts.
  • Trustee or Executor. If the Trustee or executor named in your documents is still in your former state, you should review whether he or she is still the best person to administer your estate plan. The distance may make it challenging to serve in that role.
  • Funding your Trust. If you have a Trust, it is important to make sure you properly title any new assets in the name of your Trust. If you purchased a home in Idaho, opened new bank accounts, investment accounts, or registered a vehicle, you should make sure they are titled in the name of your Trust. This will ensure that your Trust works as intended and avoids the probate process.
  • Marital property. Idaho is a community property state. If you are married, you should review the impact of Idaho’s community property laws on your estate plan. If you are moving from a state without community property laws, there may be differences in how it affects your finances and your estate plans.
  • Medical directives. A medical directive is a legal document that designates a person to make health care decisions on your behalf if you are disabled (oftentimes called a medical power of attorney), and may also provide instructions on life sustaining treatment (oftentimes called a living will). Idaho will honor your medical directive if it was completed correctly in another state. Each state, however, has its own form for the medical directive. In Idaho, you will use a document titled “Living Will and Durable Power of Attorney for Health Care.” Although your medical directive from your former state is valid in Idaho, you do not want your doctors delaying treatment as they determine whether your out-of-state directive was properly completed. Updating your directive to the Idaho Living Will and Durable Power of Attorney for Health Care will avoid potential issues and delays.
  • Avoiding probate in multiple states. If you own real estate outside of Idaho, a revocable living trust can streamline your estate plan. If fully funded, your revocable living trust avoids both probate in your state of residence, and ancillary probate in any other state where you own property.

The term ancillary probate is used to describe probate in a state other than the state of your last residence. For example, if you own a beach house in Oregon in your individual name, but you live and pass away in Idaho, ancillary probate will be held in Oregon and probate will be held in Idaho.

Ancillary probate means two attorneys (one licensed in each state), two courts and two executors or administrators (one in each state), two sets of fees and, maybe, two different sets of heirs, if state intestacy laws apply. (Intestacy refers to the condition of an estate if someone dies without a Will or if the Will covers only part of the estate).

You can avoid probate and ancillary probate with a fully funded revocable living trust. Fully funded means that all of your assets have been funded, or transferred, into the trust. For real estate, you would need to deed the property from your name to your name as trustee of your trust. Assets that commonly cause ancillary probate are time shares, vacation homes, condominiums and any personal property such as home furnishings and cars owned in another state. If you wish to avoid probate and ancillary probate, make sure that your revocable living trust is fully funded and your assets are properly titled.

 

The Idaho Lifestyle, with Benefits

For many people, the decision to live in Idaho is about quality of life. Even though you may want to stay in Idaho, it is useful to look at strategies for minimizing taxes.

In the paragraphs below, we discuss strategies for finding tax advantages in other states while keeping your residence in Idaho.

Non-Grantor Trusts

There are seven (7) states without a state income tax and two (2) that do not tax wages. All other states, including Idaho, impose a tax on income. In addition to the states, there are almost 5,000 local jurisdictions that also charge a tax on income. State income tax is even more important now because the deduction on federal tax returns is capped at $10,000, if you are even itemizing at all.

Since Idaho has an income tax, the use of a non-grantor trust may allow you to minimize state income taxes. A non-grantor trust simply allocates the taxes to the location of the trust rather than that of the grantor or beneficiaries. The key is the use of a trustee that is authorized to accept trusts in a tax free state. For instance, D.A. Davidson Trust Company is a federal savings bank for trust purposes, and since we are federally regulated, we are authorized to accept trusts in any state, including an income tax-free state.

The use of non-grantor trusts should be carefully analyzed by an accountant and attorney to identify any restrictions. These trusts can result in large tax savings, especially when used while planning a sale of a highly appreciated asset.

Limited Liability Companies (LLCs)

LLCs are a flexible business entity, which is great for estate and tax planning. There are many advantages to an LLC, including:

  1. Asset protection – A creditor can only go after assets owned by the liable LLC. It is a good way to parcel out high risk assets from lower risk assets.
  2. LLC membership units – These act as shares and easily can be used to divide partial ownership of assets; rather than trying to deed 10% ownership, you simply transfer 10% of the units.
  3. Useful governance documents – It is not uncommon for disputes to arise among common owners when it comes to costly repairs. LLC documents can provide a framework to resolve disputes more smoothly among multiple owners.
  4. Favorable valuations – If there is a valid business reason for creating an LLC and transferring units other than just to receive a discount, the courts have upheld discounts of ownership for lack of control or minority ownership. These discounts can directly reduce estate tax. The IRS has held that owning 90% of an asset is worth less than 90% of the asset’s value.
  5. Conversion of real estate ownership to personal property ownership – This is beneficial in many situations. For example, if an Idaho resident owns an Oregon beach house, owning real estate in Oregon subjects a person to Oregon estate tax on the value of that real property. However, if they deed that property into an Idaho LLC, it is now personal property and no Oregon estate tax is owed.
  6. Allows transfer of ownership but retention of some management or control – This is great for people who need to gift for estate tax purposes but are not willing to completely turn over their assets. A word of warning, however, the IRS has designated some powers that must be delegated to a third party, such as distributions. That is an ideal opportunity to leverage a corporate trustee.

For many of us, the selection of Idaho as our state of residence was likely not based on tax impact. D.A. Davidson is here to help families identify the most appropriate course of action to minimize your tax burden. Our team of experienced professionals can be reached at (208) 667-1212.

Disclaimer: D.A. Davidson does not provide tax or legal advice. Please consult with your tax and/or legal professional for guidance on your specific situation.