Wealth taxes reshape affluent clients’ residency choices

Financial advisors are rethinking residency advice for affluent clients as a wave of enacted and proposed wealth taxes emerges across the United States. Advisors say the measures are one of several factors to weigh when helping clients choose where to live.

Several levies are already in effect or scheduled to start. New York City is rolling out a pied-a-terre tax while litigation continues. Washington state plans a 9.9% tax on taxable income above $1 million, effective Jan. 1, 2028. Maine enacted a 2% surcharge retroactive to Jan. 1 on income above $1 million, or $1.5 million for joint filers. Minnesota legislators have proposed a 1% tax on taxable wealth above $10 million.

California voters will decide in November on a ballot measure that would impose a one-time 5% tax on accumulated wealth above $1 billion, retroactive to residents as of Jan. 1. Two competing California measures could limit or block such taxes: one would require pre-election audits of certain tax initiatives and restrict enforcement of some taxes, and the other would bar new taxes on control or ownership of individually held assets, retirement accounts and other personal savings and would prohibit retroactive taxes.

Andy Whitehair, director in the national tax practice at Baker Tilly, noted that advisors are bringing residency and tax questions into planning conversations earlier when clients have flexibility about where to live. He added that advisors who meet with clients regularly and manage assets under management fees often learn about upcoming liquidity events and can raise residency issues ahead of those events. ‘Financial advisors sometimes are well-positioned to bring up these issues and help start these conversations earlier when it’s going to be better from a tax standpoint,’ Whitehair said.

Breaking legal domicile can be difficult, and aggressive state audits create hurdles for clients considering relocation. David Heilich, partner who leads the estate, gift and trust group at Armanino, pointed out that it is hard to break domicile once established, especially in states that audit residency aggressively.

The court case over New York City’s pied-a-terre tax has added uncertainty. Whitehair described clients receiving notices that they might be subject to the levy and questioning whether they qualify for exemptions. He recounted clients asking whether to apply for an exemption when it is unclear whether the tax is being enforced and noted that the confusion creates practical problems for planning.

Tax policy is divergent across states. The Tax Foundation reports eight states lowered individual income tax rates this year: Indiana, Kentucky, Mississippi, Montana, Nebraska, North Carolina, Ohio and Oklahoma. Advisors say that contrasts with states adding new levies and becomes part of residency calculations.

Tax professionals recommend running scenario analyses to show how proposed measures, retroactive provisions and enforcement risk could affect net worth, income and estate plans. Damien Martin, partner in the private tax and financial services organization at EY, advised modeling different outcomes and noted that ballot measures require a different type of analysis than routine legislation.

Advisors working on residency planning now account for a mix of enacted levies, proposed wealth taxes, potential retroactivity and state enforcement practices while also considering family ties, business locations and personal lifestyle preferences.