Independent Thinking^®

A New Perspective on Home: Jeff Maurer on Baby Boomers Changing Domiciles

One of the pleasures in getting older can be expanding our horizons, to include a new life in a new place, while retaining our ties to our family, communities and even work. We may even be able to save our heirs and ourselves considerable sums in the process.
 

Although many affluent Baby Boomers will, like earlier generations, pick up sticks entirely and move south on retirement, increasing numbers of us seem to be mixing it up, renting and then buying vacation homes to enjoy an active lifestyle with our family and friends while remaining engaged with our communities and our work. Expanding travel options, ranging from JetBlue to NetJets and including all sorts of residence clubs, are helping to blur the lines between work and retirement, and keep families together across the generations.
 
If we choose our destination carefully, we can consider converting the vacation home to a permanent residence for tax purposes, enjoying significant opportunity to save money on income taxes and on gift and estate taxes, while still spending time in both places and continuing to explore new horizons.
 
The lifestyle advantages of a winter in Florida or Nevada, or for still passionate skiers, Wyoming, over, say, New York or Minneapolis, are obvious. The tax advantages can be equally compelling. For example, a New York couple in their 60s with an estate of $25 million and adjusted gross income of $1 million is charged an effective tax rate of 40.2%, paying $65,894 a year in state income tax alone by our calculations (in addition to the $355,726 that they owe the Federal government each year). If the same couple established their domicile in Florida, they would cut their annual tax rate to 33.6%. More significant, they would reduce the tax on their estate by almost $2.085 million (assuming the Federal estate tax exemption of $5.34 million per person or $10.68 million for a married couple); leaving their heirs with considerably more than if they had stayed in New York.
 
Lower or no state income taxes can translate into higher real estate prices and property taxes in many locations but, for many of our clients in New York, New Jersey, Connecticut, Minnesota, California and other high- tax jurisdictions, the trade-off can be well worth the move, at least on the financial front. Our clients already domiciled in Florida want to preserve their tax status and are careful that their summer vacation homes do not turn into permanent residences.
 
Less appealing for most is the prospect of leaving family, and friends, especially as many affluent Baby Boomers tend to be very engaged members of their communities. But again, expanding transportation options can make these choices less absolute than they once were, both for retirees and for those still engaged in the workforce. When adult children realize the extent of the savings on the estate, they are usually more than willing to keep houseplants watered over the winter (and are generally happy to visit then too).
 
State tax laws can be complicated and states like New York do not let their taxpayers go without a fight. The exact circumstances for each family will differ and it is important to consult your wealth advisor – and your attorney and accountant – to understand the potential consequences and help formulate your own plans.
 
For me and my wife, work and young grandchildren in New York will continue to trump retirement for the foreseeable future. But we would rather read to those children about the weather described by Dr. Seuss in The Cat in the Hat (“The sun did not shine. It was too wet to play. So we sat in the house. All that cold, cold, wet day”) than experience it on a daily basis again this winter, so a vacation home just might be in our plans.
 
Jeff Maurer is the CEO of Evercore Wealth Management. He writes regularly on the opportunities and challenges facing Baby Boomers. He can be contacted at [email protected].