Retirees often consider moving out of Minnesota to a state with warmer weather and beautiful scenery, but what they may not realize are the potential risks as well as the potential benefits associated with relocating out of Minnesota.

Compared to a number of other states, Minnesota is quite frosty towards retirees when it comes to taxes. Unlike some other states, Minnesota taxes pensions, social security, and other forms of retirement income at a maximum rate of 9.85%. Minnesota also has an estate tax, while a number of other states do not. This means, at your passing, if your total assets are more than the exemption amount your heirs may have to pay up to 16% of the excess in taxes to Minnesota.

With that in mind, you may be thinking that you could avoid these taxes by moving to a tax-friendly state or spending more time in your winter state, while still keeping your home in Minnesota. Relocating out of Minnesota is tricky, especially if you intend to maintain a home and frequently visit Minnesota. If residency in a state other than Minnesota is not properly established and abided by, Minnesota could still demand taxes from your retirement income and overall estate, potentially with interests and penalties.

The Minnesota Department of Revenue determines residency based on the 183-Day Rule and Domicile. Generally, Minnesota will still consider you a resident of Minnesota for tax purposes if you spend more than six months during the year in Minnesota, you or your spouse rent, own, or occupy a home in Minnesota, and you seemingly intend to permanently live in Minnesota. Those are not the only factors. In fact, the Minnesota Department of Revenue has released a 27-factor list it uses when determining if you have truly relinquished your Minnesota residency.

Even if you properly relocate to a state outside of Minnesota, if you pass away with an estate worth more than the exemption amount, your estate could be subject to tax on the property you own within the state of Minnesota. Additionally, after you pass away Minnesota will conduct a 3-year look back to determine if any gift(s) you made during the three years preceding your passing should be included in the estate for tax purposes.

Given the state of Minnesota’s aggressive stance on residency and taxation, if you are considering moving out of Minnesota it is imperative to contact an estate planning attorney to assist you in severing Minnesota residency and arranging and documenting your assets in ways to minimize tax liability.