Why state tax planning matters for high-net-worth individuals

High-net-worth individuals (HNWIs) face taxes at both federal and state levels. While federal rules are uniform, states differ dramatically on income tax rates, capital gains treatment, estate and inheritance taxes, property tax rules and reassessment triggers, and the reach of nexus rules for businesses and trusts. Small differences can translate into six- or seven-figure impacts over time, so state-level planning belongs in any comprehensive wealth strategy.

In my practice advising HNW clients, I’ve seen three recurring drivers of state tax risk: residency ambiguity, poorly chosen trust or corporate situs, and unanticipated property tax reassessments after transfers. Addressing those early — with documentation and professional coordination — often prevents costly disputes and double taxation.

(Authoritative note: for federal guidance on residency questions and tax filing, see the IRS site; for consumer-facing state tax topics, see the Consumer Financial Protection Bureau.)

Sources: IRS—https://www.irs.gov; CFPB—https://www.consumerfinance.gov

Key state-level issues that affect wealthy taxpayers

  • Residency and domicile. States apply different statutory tests (days-of-presence, “domicile” intent, or a fact-intensive totality-of-circumstances test). Many wealthy taxpayers who split time across states underestimate how easy it is to be treated as a resident for tax purposes. See our deep-dive on residency strategies: State Tax Residency Strategies for High-Net-Worth Individuals.

  • State income and capital gains taxes. Some states (e.g., Florida, Texas, Nevada) have no individual income tax; others (e.g., California, New York) have top rates that materially increase effective tax on earned and certain investment income. For capital gains, many states tax gains as ordinary income, so timing the sale and the taxpayer’s state of residence at sale matters.

  • State estate and inheritance taxes. Federal estate tax and state estate/inheritance taxes are separate. A taxpayer might be below the federal estate tax threshold but still face state estate or inheritance taxes with lower thresholds. For an overview of state/federal differences and planning tools, see Estate Tax Basics: Who Pays and How to Plan.

  • Trust situs and trust taxes. Where a trust is administered, where trustees live, and which state’s law governs the trust can determine state income tax on trust income and estate tax exposure. For certain clients I recommend moving trust administration or establishing a trust in a trust-friendly, low-tax jurisdiction — but execution and ongoing administration must be defensible.

  • Property tax and reassessment triggers. States and counties vary on reassessment rules when real property changes hands. Transferring property to children or to trust can trigger reassessment and higher recurring taxes.

  • Sales taxes and excise taxes. For high-spend lifestyles, state sales taxes and luxury excise taxes matter — especially where large, taxable purchases occur.

  • Nexus and business taxes. High-net-worth taxpayers who own pass-through entities or businesses must watch nexus rules across states; the presence of sales, employees, or remote work can create unexpected filing obligations.

Practical, prioritized steps for HNWIs (actionable checklist)

  1. Document domicile when you move. To establish a new state of domicile, take clear steps: obtain a driver’s license, register to vote, update estate planning documents and beneficiary designations, move primary medical and legal advisors, and spend materially more time in the new state than the old. Keep a contemporaneous relocation log and preserve transactional evidence (home sale/purchase records, utility bills). States often use a facts-and-circumstances test; strong documentation matters in audits.

  2. Evaluate the timing of sales and income recognition. For owners of private companies or large concentrated positions, timing an exit around a change in residency can change state capital gains exposure. Coordinate sales contracts, 83(b) elections, and closing dates with tax counsel.

  3. Review trust situs and trustee residency. If a trust produces income, confirm which state governs taxation of that income. When appropriate, consider relocating trust administration to a favorable jurisdiction — but do so with professional opinions that demonstrate valid business reasons.

  4. Confirm probate and estate tax plans are state-aware. Revise wills and beneficiary designations after a move. Use state-specific instruments (e.g., irrevocable life insurance trusts placed correctly to avoid state inclusion) to reduce state estate tax risk; see our related piece on life insurance and estate liquidity: Using Life Insurance for Estate Liquidity Without Estate Tax Exposure.

  5. Check property transfer rules. Don’t assume intra-family transfers are tax-free at the state level. A transfer can trigger reassessment, transfer taxes, or change the tax basis for heirs.

  6. Revisit SALT and itemized deduction strategies. The federal state-and-local-tax (SALT) deduction cap still affects high state-tax payers. Consider charitable bunching, donor-advised funds, and prepayment timing when planning deductible state taxes — but confirm current federal rules with your tax advisor (see IRS guidance).

  7. Maintain a residency “paper trail.” For clients who split time, I recommend keeping a digital calendar with location tags and contemporaneous travel/household records. In contested residency cases, the difference between a good paper trail and none often decides the audit.

Common planning tools and how they perform at the state level

  • Irrevocable trusts (e.g., grantor vs non-grantor). Grantor trusts may leave income taxed to the grantor; non-grantor trusts can shift income tax to beneficiaries in favorable states. But states can apply “throwback” rules or tax trusts differently; consult state law.

  • Dynasty trusts and ACTs (asset protection trusts) in favorable jurisdictions. Some states allow long-duration trusts with protective statutes; note that other states may tax trust income if the trustee or beneficiaries are residents.

  • Qualified personal residence trusts (QPRTs), GRATS, and lifetime gifting. These federal techniques also have state implications — gifts can trigger state transfer taxes or reassessments.

  • Irrevocable life insurance trusts (ILITs). ILITs are commonly used to keep life insurance proceeds out of an estate for federal purposes and can reduce state estate exposure when structured correctly (e.g., avoid retained incidents of ownership).

Common mistakes I see and how to avoid them

  • Assuming a move alone suffices. A physical move without changed ties (voter registration, driver’s license, physician relationships, bank accounts) is weak evidence of domicile change. Many clients are surprised by state audits when the move is incomplete.

  • Ignoring multiple connections. Rental properties, business activities, and spouse’s residency can create dual-residency or nexus issues.

  • Over-focusing on income taxes. Property taxes, estate taxes, and business-level taxes frequently offset any savings from lower income-tax rates.

  • Failing to coordinate advisers. Legal, tax, and financial advisers must coordinate move timing, trust situs, and transaction dates to avoid unintended tax events.

Audit risk and disputes

States aggressively enforce residency, nexus, and estate tax rules because the revenue impact is large. If a state challenges your tax residency, expect document requests on travel, transactions, and local ties. Retain contemporaneous records and hire local counsel when necessary. If a dispute reaches litigation, documented intent and pattern of life are the strongest defenses.

When moves don’t make sense

Relocating for tax reasons is not always cost-effective. Consider moving costs (real estate transaction costs, family disruption), ongoing differences in property taxes and cost-of-living, and non-tax benefits such as schools and business ecosystems. I recommend a pre-move cost-benefit analysis that includes multi-year cash flow modeling and sensitivity to tax-law changes.

Final recommendations and next steps

  1. Begin with a residency audit of your current facts: where you spend time, where key relationships are located, and the state law tests that apply.
  2. Engage a cross-disciplinary team (estate attorney, CPA experienced in multi-state issues, wealth manager).
  3. Document proactively: driver’s license, voter registration, physician letters, and utility records are inexpensive insurance.
  4. Revisit plans annually to account for law changes and life events.

Professional disclaimer: This article is educational and not individualized tax, legal, or investment advice. State tax laws change and fact patterns vary — consult a qualified CPA and estate attorney before making decisions.

Authoritative resources

Related FinHelp glossaries

(Revision date: 2025. Check current IRS and state tax authority guidance before acting.)