There are two basic words that are used in common language, but may have quite different legal meanings. You may be a resident of a given location, but you can only have one “domicile.” Your domicile is your permanent place of residence. It is where you reside most of the year and where you intend to make your fixed and permanent home.
There are multiple reasons why someone may want to change his or her domicile, including climate, geography and access to family, among others. Often, there are also economic reasons to change domicile, including income, inheritance and estate taxes and asset protection rules, such as homestead exemptions.
So, where you live can affect the taxes you pay during your life, as well as the distribution of your estate assets and the estate taxes your estate will owe after your death.
If you have homes or a residence in more than one state, you may decide for tax or other reasons to move to a new state. However, the auditors of the “old state” revenue department may seek to find reasons for you to pay income or estate tax to the old state. However, before deciding to legally change your domicile, you should very carefully assess the consequences of such a move. Making the move for tax purposes alone can often backfire, since laws change constantly, especially tax laws, as we have seen on the federal level over the last several years.
There are several flags that state tax auditors will examine to try to show that you still are domiciled in the old state.
1. If you have retained your old home and it is more valuable than the new state home, that will be considered.
2. You spend a sizable period of time in the old home and employ domestic assistance there.
3. If you have a business and are actively involved in the business, that could show that you intend to stay in old state and are subject to taxes there.
4. If you spend the majority of your time (and most states count any part of a day as a day in the state), then you could be considered domiciled in old state.
5. If you have valuable art collections or other items of great personal importance and you keep them in old state, that is another potential tie.
6. If there are children, grandchildren, nieces or nephews or other relatives that you regularly visit in old state, that suggests intention to remain there.
While the question of domicile is a fact-based issue, any of these factors will be used by state tax auditors to try to collect estate tax from your executor. If you intend to change your domicile to a new state (perhaps a low-tax state), there are a number of steps that you should take.
In order to change your domicile to another state, in most cases it is necessary for you to move to that state. While you can inherently maintain only a single domicile at any given time, it is not unconstitutional for more than one state to claim a decedent as a domiciliary of that state for estate tax purposes. It is possible that, in attempting to transfer to a more favorable domicile, a taxpayer might end up subject to the domiciliary claims of more than one jurisdiction, leading to a variety of highly unfavorable tax consequences. Most states have reciprocal exemption statutes authorizing the compromise of conflicting death tax claims based on domicile. However, neither Arizona nor Florida have them, and Arizona, New York, Florida, and Illinois have no provisions for arbitration of domicile disputes. The question then becomes: “how can we effectively plan for a taxpayer’s successful transfer to another domicile?”
State Inheritance and Estate Taxes
If you have homes in more than one state, then the question of domicile may become quite important. For example, if your will were declared invalid the laws of your state of permanent residence would determine who receives your property. These laws vary substantially from state to state, and they are quite likely to generate litigation by distant cousins and other family members. Some family members may receive more under the law of state A and some may receive more under the law of state B. This result will nearly always lead to litigation – with a potentially huge cost to your estate.
In 1976, a successful business owner with a large estate died. He had grown up in Texas, lived for some time in California and then moved to Nevada, where he also lived for many years. At the time of his death, he had a $2.5 billion estate, so there were substantial federal and state taxes.
The estate proceedings were held in Nevada, but both California and Texas sued to collect state estate tax. Ultimately, the Nevada Court determined that the businessman’s domicile was in Nevada. This was an important finding, since the 40 wills that had been submitted were all determined invalid under Nevada law. As a result, the estate was distributed to 22 cousins under the intestacy laws of Nevada.
While this was an unusual case with a very large estate value, there are plenty of reasons why it is important to understand the basic rules of domicile. Where you live can affect both the distribution of your estate assets and your estate taxes.
Many states have an estate tax that is calculated using the amount that once was the state portion of the federal estate tax. This is commonly called the “pickup tax.” While the federal rules have changed, many states still use the calculation to determine the amount of state tax your estate will pay. Many states also have an exemption amount and collect tax on the excess value over that amount.
Other states have an inheritance tax. The tax rate depends upon the person who receives the property. A spouse, a child, a grandchild and a niece may all have a different tax rate.
Finally, some states have a combination estate and inheritance tax. The following table is a summary of state death taxes for the states that are collecting tax as of the date of publication.
|State||Type of Tax||Exemption|
|Connecticut||Pick up tax||$2.0 Million|
|Delaware||Pick up tax||$5.25 Million|
|District of Columbia||Pick up tax||$1 Million|
|Hawaii||Pick up tax||$5.25 Million|
|Illinois||Pick up tax||$4 Million|
|Maine||Pick up tax||$2 Million|
|Maryland||Pick up & Inheritance||$1 Million|
|Massachusetts||Pick up tax||$1 Million|
|Minnesota||Pick up tax||$1 Million|
|New Jersey||Pick up & Inheritance||$675,000|
|New York||Pick up tax||$1 Million|
|North Carolina||Pick up tax||$5.25 Million|
|Oregon||Pick up tax||$1 Million|
|Rhode Island||Pick up tax||$910,725|
|Vermont||Pick up tax||$2.75 Million|
|Washington||Estate tax||$2 Million|
This table is generally accurate as of the publishing date. However, state death taxes are regularly changed. You should seek advice from qualified professional advisors about taxes in the state in which you live, or in the state to which you wish to relocate.
No single factor can prove a taxpayer’s domicile. It is well settled that domiciliary transfers involve “an actual removal evidenced by positive overt acts . . . [in which] the bona fides of the [transferor’s] intention [are] a highly significant factor.” The U.S. Supreme Court has consistently maintained that the question of a state’s domiciliary jurisdiction is one for the states to decide in and among themselves. Over time, states have taken a subjective, totality of the circumstances approach, essentially amounting to a “you-know-it-when-you-see-it” analysis. Generally, the determination of a taxpayer’s domicile involves: (i) an objective inquiry into whether there is a permanent residence maintained in the target state, and (ii) subjective inquiry into the intent to abandon a former domicile and acquire the new one. The latter requires “overt acts” that might be considered more or less relevant in any given jurisdiction.
The burden of proof lies with the taxpayer to demonstrate that he or she has both: (i) acquired a new domicile; and (ii) completely abandoned his or her former domicile. Therefore, careful consideration must be given to the stated guidelines of the taxpayer’s target state as well as the taxpayer’s state of origin, lest the taxpayer be treated as a domiciliary by both. While many of the elements involved in proving up each will overlap depending upon which states are involved, a successful transfer requires manifest compliance with whatever state-specific criteria are affirmatively stated by each side of the transfer. Following, are the considerations involved in both sides of the equation in the scenario where a taxpayer wishes to make the transition from an Illinois domicile to that of Florida.
Many states have administrative rules that set forth the requirements for establishing domicile. For example, where Florida is the target state, the state’s administrative Code §196.015 lists the following actions as persuasive to a taxpayer’s intent:
1. Filing a formal Florida Declaration of Domicile in the Clerk of Courts office of the Florida county of residence (if property is owned by a husband and wife, this declaration should be filed by both);
2. Designating a Florida mailing address;
3. Making informal statements (evidenced via affidavit) regarding one’s Florida residency;
4. Maintaining place of employment in Florida;
5. Terminating previous residency in another state;
6. Registering to vote in Florida;
7. Obtaining a Florida driver’s license;
8. Acquiring Florida license tags on all your vehicles;
9. Using a Florida address on your federal income tax forms; and/or
10. Retaining any previously filed Florida intangible tax returns.
Regardless of the state to which you intend to transfer your domicile, tax professionals consistently advise that you take the following actions as support of your bona fide intent to transfer to a new domicile:
1. Buy a home in new state; this is a very clear indication that you plan to live there;
2. Prepare a new will reciting new state as the new state of domicile;
3. Minimize the time spent in old state; you should keep track of the time that you spend in old state – the majority of your time should be spent in new state; it is helpful if over 183 days per year are spent in new state.
4. Obtain your driver’s license in new state and, if necessary, attend training or education courses related to driving vehicles in new state.
5. Register all of your vehicles, such as your cars, boat or recreational vehicle in new state.
6. Register to vote in the new state. Do not vote again at any time in old state.
7. dispose of assets in old state, or convert them into intangible assets such as family partnerships;
8. File for new state homestead exemption;
9. Move all checking, savings and brokerage accounts to new state and close any safety deposit boxes in old state;
10. Register a change of address with creditors;
11. Change your passport address to reflect new state residence;
12. Transfer tangible property to new state;
13. Sell real property interests in other jurisdictions;
14. Sell business interests in other jurisdictions;
15. Acquire cemetery plot(s) in new state; and
16. Retain professionals in new state in an advisory capacity, including doctors and accountants and transfer all of your medical records and financial records to the new advisors.
In regard to proving the abandonment of Illinois as the originating state of domicile, there are two primary presumptions set forth in the State’s Administrative Code:
1. presumption in favor of domicile where an individual has spent, in the aggregate, more than nine months of any taxable year in Illinois; and
2. presumption of domicile elsewhere where an individual is absent from Illinois for one year or more.
These presumptions are not conclusive and may be overcome by contrary evidence. Here again, the taxpayer’s subjective intent is the controlling factor in either confirming or rebutting this presumption. The Code specifically suggests that a taxpayer perform the following:
1. Obtain voter registration;
2. Transfer automobile and driver’s license registration;
3. File an income tax return as a resident of another state;
4. Memorialize home ownership or rental agreements;
5. Seek out club and/or organizational memberships in the new state of domicile; and
6. Use telephone and/or other utilities over a duration of time.
Tax professionals further advise the following:
1. Do not ONLY maintain a home in the new state, but ALSO sell any home in the former, or downsize to a smaller home at the very least;
2. Do not only obtain a new driver’s license and/or automobile registration, but cancel the former of each;
3. Do not only file a tax return in the target state, but also file a final return in the original state and cease filing further returns in the former jurisdiction, OR file a non-resident income tax return in the former jurisdiction;
4. Do not only register to vote in the new state, but actually vote;
5. Do not only file a homestead exemption in the new state of domicile, but also cancel the exemption in the original state of domicile); and
6. Do not only join social and religious organizations in the new state of domicile, but participate in them as well; also cancel any memberships in those groups in the former state of domicile, requesting that addresses and membership information be updated.
Domicile is generally a subjective concept with many interpretations and different states apply different analyses to determine domicile. Planning for domicile becomes even more complex in multi-jurisdictional claims, since there is nothing to prevent two states from concurrently asserting domiciliary dominion over a taxpayer. To ensure a finding of domicile in the chosen state, the taxpayer should do his or her best to comply with the actions reflected in this article.