Overview

High-net-worth individuals (HNWIs) can materially reduce state-level tax burdens—income, capital gains, and sometimes estate taxes—by changing residency to a low- or no-income-tax state and by aligning economic and personal ties with that new domicile. Because states use different residency tests (domicile, statutory presence, and factors tests), successful strategies are legal, evidence-based, and documented. This article explains practical steps, timing, documentation, common pitfalls, and how to anticipate state challenges.

Why residency choices matter for HNWIs

Even a single, large liquidity event (sale of a business, IPO, or multi-million-dollar bonus) can create state tax obligations measured in tens or hundreds of thousands of dollars. For example, moving domicile from a high-rate state to a zero-income-tax state before (or in advance of) a planned liquidity event can reduce state tax exposure on wage and ordinary income and sometimes affect state-level capital gains treatment. However, states scrutinize moves around liquidity events; careful advance planning and contemporaneous evidence are essential.

Authoritative context: state income tax rates and rules vary widely (see Tax Foundation and state revenue departments). The U.S. federal tax system does not replace state residency rules—each state enforces its own standards and audits (see state revenue guidance; for federal guidance on domicile issues as they impact federal matters, see IRS resources).

Core components of a defensible residency strategy

  1. Domicile change (intent + physical move)
  • Domicile is the place you intend to make your permanent home. Changing domicile requires actions that show intent to abandon the old domicile and adopt a new one: sell or significantly reduce ties to the prior home, establish permanent residence in the new state, and create ongoing ties (driver’s license, voter registration, professional memberships). For deeper reading, see our piece on Residency vs. Domicile for Tax Purposes (internal link).
  1. Physical presence and day-count management
  • Many states apply a statutory presence test (e.g., more than 183 days) or use multi-factor tests. Keep contemporaneous travel logs and corroborating evidence (credit card statements, geolocation, work calendars). For frequent travelers and those with multi-state activity, our guide State Tax Residency Moves: Costs, Timing, and Tax Traps explains timing considerations (internal link).
  1. Economic and social ties
  • Move banking, primary physicians, social clubs, religious affiliations, estate planning contacts, and professional advisors to the new state. Update wills, powers of attorney, and trusts to reflect the new domicile where appropriate.
  1. Business and income-source planning
  • For business owners and executives, consider where the business is organized, where management functions occur, and whether compensation is sourced to the old state. Nexus and withholding rules can create exposure even if you are domiciled elsewhere. Coordinate with payroll and outside counsel to manage withholding and reporting.
  1. Trusts, LLCs, and estate planning
  • Trust situs, trustee location, and trust administration can affect state tax exposure. For HNW families, retitling assets, changing trustee residence, or moving irrevocable trusts may be necessary—but these moves trigger their own legal and tax considerations.
  1. Timing and advance planning
  • Adopt residency well before a planned major event. States look for “substance over form”—a last-minute paper change without supporting life changes is vulnerable in audits.

Practical checklist: steps I use in practice

  • File a new driver’s license and register to vote in the new state.
  • Change mailing address and update bank accounts, mortgage/lease, and safe-deposit box locations.
  • Enroll family in local schools (if applicable) and establish primary physicians.
  • Move at least the majority of personal property and keep utility bills in the new name/address.
  • Update wills and estate documents; discuss trustee and fiduciary changes with counsel.
  • Notify professional advisors, clubs, and service providers; transfer memberships when possible.
  • Maintain contemporaneous travel logs and digital evidence (calendar entries, geolocation, payment records).
  • For business owners: document where management decisions are made; adjust payroll and withholding when appropriate.

I tell clients: document early and heavily. In audit scenarios, consistent, contemporaneous evidence carries more weight than recollection or retroactive affidavits.

Common traps and audit red flags

  • Buying a vacation home or retaining a primary home in the old state without reducing ties there.
  • Having most of your income sourced, earned, or paid from the old state (e.g., continuing to work onsite for an employer based in the previous state).
  • Family continuing full-time residence, schools, or social life in the high-tax state.
  • Changing domicile immediately before a liquidity event—this invites aggressive scrutiny.

States known for active residency audits include California and New York, which generally apply a multi-factor analysis that looks at the full pattern of life (see state revenue audit guidance). Keep in mind: auditors evaluate the totality of the evidence; no single act proves or disproves domicile.

Special situations and planning nuances

  • Part-year residency: If you move mid-year, you may owe part-year tax to the old and/or new state depending on source rules. Plan estimated taxes and withholding accordingly.
  • Remote work and multi-state employers: Multiple states may claim withholding or taxing rights based on where work is performed. Review employer withholding rules and consider payroll adjustments.
  • Trusts and decanting: Moving trustees or changing the governing law of a trust can change state tax exposure; get trust counsel involved.
  • Estate and inheritance taxes: Some states (e.g., historically New York, New Jersey) have estate or inheritance rules that can still affect planning decisions; consider the interplay with federal estate planning.

Real-world examples (anonymized)

  • Example A: A founder planned an exit in 18 months. We recommended establishing domicile in a no-income-tax state at least 12 months before the expected liquidity event, transferring primary residence, establishing local ties, and documenting the move. The founder also transitioned management meetings and bank accounts. At exit, state exposure was materially reduced; contemporaneous records supported the claim during post-close withholding reviews.

  • Example B: A senior executive moved to a neighboring state but continued commuting daily to the former state and kept family and most social ties there. An audit found the old state retained taxing rights for part of the income. The takeaway: substance matters.

Costs, timing, and pragmatic trade-offs

Moving domicile has direct costs (relocation, housing market differences, professional fees) and indirect costs (changes in property taxes, sales and excise taxes, and cost of services). For example, some low-income-tax states have higher property taxes or local sales taxes. Run a holistic after-tax cost analysis that includes state income tax, property tax, estate tax, and quality-of-life factors.

See our related analysis State Tax Residency: When a Move Makes Sense for Your Taxes for a decision framework (internal link).

Audit preparation and defense

  • Retain contemporaneous records: calendars, flight itineraries, receipts, credit-card statements, utility bills, and medical records.
  • Document the rationale: financial modeling showing expected tax savings, correspondence with advisors, and transactional timelines.
  • If audited, engage a tax attorney experienced in the specific state’s residency audits immediately. Professional representation often preserves negotiation leverage and reduces the risk of interest and penalties.

Authoritative resources for audit standards: state department of revenue guidance and appeals processes; consult state-specific audit manuals and published guidance.

When to get professional help

Engage specialized counsel and tax advisors when: you expect a major liquidity event, you have complex trust or business structures, you split time between states, or your family situation complicates domicile determinations (e.g., children in school, spouse residence). In my practice, complex moves require a coordinated team: tax CPA, tax attorney, estate lawyer, and relocation planner.

Quick reference — Documentation you will need

  • Driver’s license, voter registration, and vehicle registration in new state.
  • Lease or deed showing primary residence and utility bills for at least a majority of the year.
  • Bank account statements and local professional service providers.
  • Logs showing time spent in each state and proof of where management decisions take place for businesses.
  • Updated estate planning documents and trustee designations.

Final considerations and ethical practice

Residency planning is legal and routine, but it must be truthful and well-documented. States scrutinize moves that appear purely tax-motivated. The right approach balances tax efficiency with lifestyle and legal risk tolerance.

Professional disclaimer: This article is educational and does not replace personalized tax or legal advice. Consult a qualified tax advisor and attorney before making residency or structural changes.

References and further reading

If you have a planned event or complex structure, build the residency plan into your broader multiyear tax plan and document every step.