Texas A person placing assets into a testamentary trust in Texas enables beneficiaries to avoid state taxes, no matter where they live. "We have a lot of folks who will move to Texas as a retirement plan," says Elizabeth Schurig, an estate lawyer with Giordani Schurig Beckett Tackett in Austin. "But even those who won’t move here might utilize Texas’ testamentary vehicles. We’ve even been doing this for U.S. citizens who live abroad, and the question is: Where do they probate their will and what do they do with their U.S. assets? One suggestion is to settle them into a Texas trust to avoid tax at death."

The Two Worst States... According to Those Who Live There
Connecticut In 2002, the Connecticut state legislature enacted an independent estate tax to serve as a stopgap measure for a budget shortfall, and made it permanent in 2005. Detractors predicted that the most well-heeled residents would flee one of the most well-heeled states. "I had a handful of clients who went through the process of changing domicile, primarily to Florida," says Paul Behling, an estate lawyer with Withers Bergman in New Haven.

"What people especially don’t like," he adds, "is that we have a cliff tax structure." In Connecticut, if an estate is worth more than the exempt amount of $2 million, the entire estate is taxed—including the first $2 million. "If you have $2 million plus one penny, the entire amount is taxed," he says, although that would be at the bottom rate of just more than 5 percent. Another source of frustration is that gifts received during a lifetime, beyond the federal exclusion of $1 million, count as part of an estate.

Yet the state with the hedge fund capital of Greenwich is still a nice place to live. According to state statistics, the number of millionaires in Connecticut increased 44 percent between 2003 and 2006.

Washington The Bill Gateses, both senior and junior, have spoken out in favor of progressive taxes that tap the rich to pay for important programs. But there is also a history of exodus since 2005, when the legislature adopted a stand-alone estate tax by narrow majorities in both houses. This followed the state Supreme Court’s decision to throw out a death tax that had been tied to the federal credit, finding it unconstitutional on the grounds that the state exemption was lower than the federal one. Shortly afterward, Services Group of America, a family business owned by Thomas J. Stewart and which was then Washington’s second-largest private company, moved to Scottsdale, Ariz. Company officials issued a statement blaming the move on the highest state inheritance tax in the nation; the top rate is 19 percent on assets of more than $9 million. Seattle developer Martin Selig provided much of the backing for a proposal to repeal the estate tax, but voters defeated it by a landslide in the November 2006 elections.

Now there is concern that history will repeat itself when the federal exemption rises to $3.5 million in 2009, while the state exemption will stay at $2 million. "I’ve had more than one client leave the state," says George Holzapfel, a principal at the law firm Lasher Holzapfel Sperry & Ebberson in Seattle. "Two have gone to Alaska, one to Idaho and one to Nevada."

Dan Weil is a freelance writer whose work has appeared in The
New York Times, the Wall Street Journal and Tennis magazine.
Jennifer O’Reilly provided additional reporting for this story.