It is once again that time of year in Wisconsin. The time when all of us ask one another, “why exactly do we live here?” Whipping winds, lack of sun and copious amounts of snow make for a long winter season. That is why many people own a second home in a much warmer climate. For those lucky snowbirds, there are some wealth management strategies to avoid problematic economic results.
Be Careful With Residency
While weather tends to be the primary motivator for snowbirds, tax minimization is a close second. For example, while Wisconsin has a 6.9% state income tax, Florida has no income tax. Having as much income as possible sourced to Florida rather than Wisconsin can have material economic benefits.
So where does income get sourced? For some income, such as employment income, it is sourced where the services are provided. For other income, such as rental real estate, income is sourced based on the location of the real estate. But for the bulk of retired snowbird income, income from retirement plans and marketable securities, income is sourced to the state of residency. Therefore, Florida residents can spend 7% more of their retirement income as opposed to Wisconsin residents.
The test for residency is multi-faceted. Among the factors considered are where someone votes, where they have a driver’s license, where they list their address for mail and the IRS and where family and business interests are located. For most states, a material factor is what is known as “presence”: how many days does the person spend in each state? For Wisconsin snowbirds who want the benefits of Florida taxation, these factors should be followed to the extent possible and detailed records should be kept showing that more time was spent at the Florida residence each year rather than the Wisconsin residence.
Do Not Create Multi-State Probate
When a person dies owning property, there is a required court process to transfer property to loved ones, called “probate.” Probate is required to either pass property by will or to pass property without will to statutorily defined family members (a process known as intestacy). Probate must be filed in (1) the state that the decedent resided in and (2) the state where property is located.
For snowbirds that own two residences, this means, without appropriate planning, filing not one, but two probates. Which raises two questions: (1) how bad is probate and (2) how can it be avoided? When it comes to how bad is probate, I always harken back to something my grandmother said to me when I was young: things are rarely good or bad, instead they tend to be better or worse than their alternatives. Probate is not bad per se, but it is less efficient and more costly than the alternative ways to get property to your loved ones. Stated another way, people educated in both probate and its alternatives almost exclusively choose the alternatives.
So, what are those alternatives. Property that is titled jointly with the right of survivorship passes to the surviving owner without probate. For jointly titled property, that might be a simple probate avoidance solution. Second, property that passes by contract avoids probate. Examples of property that can pass by contract are IRAs, life insurance policies, and accounts with transfer on death (TOD) designations. That property passes to the beneficiary at the death of the owner without probate.
Finally, property that is not owned by the decedent does not, by definition, require probate. Many people elect to transfer property to a trust during their lifetime. This trust, that the transferor controls for his or her benefit and enjoyment is colloquially known as a revocable trust or lifetime trust. For snowbirds, a best practice to avoid two inefficient and costly probates is to transfer all their property to a revocable trust.
Planning for Incapacity
There are two critical documents people should have in case they become incapacitated. The first is a financial power of attorney. An FPOA empowers a trusted spouse, family member or friend to make financial decisions for you if you cannot. The second is a health care power of attorney, which empowers a health care decision maker upon a person’s incapacity. While state law on the requirements of these documents are relatively consistent, some states can have material differences in what each document requires. If snowbirds create a document under the laws of their state of residency, the document should be valid under both that state and any other state. However, sometimes judges have challenges applying and enforcing other state’s laws. For people who will be spending material time in more than one state, it is a best practice to craft documents that meet all the requirements of both states rather than just one.
Conclusion
For those people with sufficient resources to enjoy two homes, ensuring that their plans work in the way intended is critically important. These snowbirds should have a team of advisors to help protect their wishes, dreams, assets and loved ones. If you need help thinking through these and other issues, please contact a Johnson Financial Group wealth advisor.
