Many clients don’t realize some states have rejected federal tax breaks in the 2025 tax law, while state tax increases and proposals are mainly pushing “edge cases” to relocate, a wealth strategist told Checkpoint.
Robert Dietz, national director of tax research at Bernstein Private Wealth Management, said that beyond headline tax policies, “there’s also a lot of smaller changes that either occurred or didn’t occur at the state levels.”
Some states decline to follow federal tax breaks
The One Big Beautiful Bill Act (OBBB), P.L. 119-21, raised the cap on the IRC § 1202 exclusion for qualified small business stock (QSBS) gain to $15 million from $10 million for stock issued after July 4, 2025.
In a May 20 Bernstein article, Dietz and co-author Richard Weaver, senior national director of executive services in the firm’s wealth strategies group, wrote that states are moving “toward provision-by-provision decoupling” and that “‘conformity risk’ has emerged as a core planning variable.”
California has long taxed QSBS gains, while Maine and Oregon have enacted decoupling legislation, they wrote. When states decouple, the benefit “can be reduced by millions on a single transaction.” New York Senate bill S8921A would have amended N.Y. Tax Law § 612 to add back federally excluded QSBS gain, but the final state budget omitted it.
Opportunity Zone conformity under IRC § 1400Z-2 “has long been uneven,” so taxpayers “may end up deferring gains federally while recognizing them immediately at the state level,” they added.
Clients often unaware of conformity gaps
Dietz said conformity is “incredibly important today” but “not on clients’ minds,” because they “see the headlines at the federal level and they just kind of assume that that’s the way it works across the board.”
As a result, “it’s when we start to go in and look at a transaction or start to do planning for a client that we uncover these situations,” he said, citing a state no longer conforming to the new QSBS provisions.
The higher QSBS cap hasn’t changed trust planning much yet, Dietz said, because new stock must be held three years for a partial exclusion and five for the full benefit. He is seeing more owners choose C over S corporation status at formation, partly because of QSBS, which is now better known after publicity over the increase. As holding periods near those milestones, he expects “larger gifts being made for trust stacking.”
Taxes push ‘edge cases’ to relocate
“I’ve never had a client or seen a client who has simply just moved because of taxes,” Dietz said. There are always other reasons, he said, but taxes are usually what “pushes them over the edge,” and “we’re seeing a lot more of those edge cases relocate.” Typically, they already spend much of their time in other states or traveling, so a move “would not be a big lift.”
He described a “cumulative effect”: clients have accepted past tax increases, new proposals keep coming, and “at some point it gets to be too much for folks, and so they make the move.” Few of his clients have rushed to leave before a proposal passes, he said, “other than a few cases in California.”
Some states also have higher rates starting in 2027, he noted, such as Rhode Island’s surtax of up to 3% on income over $1 million under its fiscal 2027 budget, H 7127. Year-end planning includes asking whether to relocate “this year versus next year,” he said.
Scenarios, not predictions, guide planning
California voters decide November 3 on Proposition 40, a one-time 5% tax on the net worth of billionaires who were state residents on January 1, 2026. Competing Propositions 41 and 42 could block it. In Washington, Initiative 645 would repeal SB 6346, the state’s 9.9% tax on income over $1 million starting in 2028.
Dietz said Bernstein takes no position on how likely such measures are to pass, instead modeling what a new law would cost a family versus no change or a move to another state. “[W]e’ve never felt like we’ve had enough knowledge to really understand which way the political winds are going to blow,” he said.
“I think there’s a premium on flexibility,” Dietz said. When the estate and gift tax exclusion faced a sunset, many Bernstein clients used installment sales or loans instead of “massive gifts,” because those strategies “could be undone very quickly and changed into a gift.” The OBBB has since permanently set the exemption at $15 million, indexed for inflation.
AI can frame questions but needs vetting
Clients are using AI “to start the initial conversation,” Dietz said, and part of his firm’s work is making sure a response that “really wasn’t vetted properly” hasn’t sent them off track. As a research tool, it can help clients frame the problem and learn basics such as probate.
“Where I think you get into trouble is when you just start asking it for advice and you say, ‘What should I do?’ And you just take that and you run with it, and you don’t verify it. That’s a problem,” he said.
Less productive is forwarding a chatbot’s answer for an adviser to respond to, which Dietz called “not a great use of anybody’s time.” Some practitioners charge a higher hourly rate in engagement letters to review AI-drafted documents or correspondence to discourage it, he said.
Dietz said he encourages clients to look past the headlines “because there’s a lot of other smaller blocking and tackling that has a much bigger impact than some of these headlines are going to have.”
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