TAX PLANNING

Changing Domicile: What Snowbirds Should Know before Taking Flight

10.12.2017 - Craig Richards, CPA/PFS, CFP

Are you thinking about moving south for the winter or relocating on a permanent basis? Better weather may not be the only benefit of such a move—lower income and estate tax rates may make the change of scenery all the more appealing. But changing domicile from a tax perspective can be more complicated than it seems. Our Fiduciary Trust senior leaders provide insights on how to prepare for a successful move.

Q. What are the potential tax benefits of moving to a different state?

CRAIG: Moving from one state to another can mean significant tax savings for certain taxpayers. For example, leaving high income tax areas such as New York City and California, both with maximum taxes around 13%, for states with no income taxes such as Florida or Nevada, can make a big difference in your take-home pay.

KEVIN: In addition, while all estates are subject to estate taxes at the federal level, some states also impose additional state estate taxes. Today, 18 states including Connecticut, Massachusetts and Maine, plus the District of Columbia, levy such state estate or inheritance taxes, and the rates can be as high as 20%. Other states, including California, Florida and Nevada, impose no extra tax. If your estate exceeds tax-free transfer exemption levels, residing in a low-tax state can mean significant tax savings for your heirs. It is important to note that state estate tax laws can change frequently, so be sure to check on the most current laws in your state and any states you are considering in a move.

Q. How is a primary residency determined from a tax perspective for residents of more than one state?

CRAIG: As people have become increasingly mobile, it’s not unusual for a resident of New York, for example, to have a winter home in Florida or California. But taxpayers cannot claim residency in a state unless they have sufficient ties to that state. And, in an effort to collect tax dollars, some states have even challenged residency claims by people with ties to multiple states.

State laws differ from state to state, sometimes significantly. For example, in New York you are deemed a resident if you maintain a permanent home in New York and spend more than 183 days per year in New York state, or if New York is your domicile.

Q. Why is it important to establish domicile in your new state after a move?

KEVIN: Establishing domicile, meaning your true permanent home, in your new home state is the most effective way to ensure you will be taxed under that state’s laws. Domicile is different than residency because while you may own homes in several states, only one can be your official domicile.

Your domicile can be open to interpretation by the state, especially if you spend lots of time out of state or have multiple residences. New York in particular is known for using real estate ownership as a basis for claiming a former resident is still a New York person. Regardless of which states you own homes in, it is important to take as many steps as possible to establish your state of choice as your domicile.

CRAIG: We recommend changing your address on all your bank and investment accounts, obtaining a local driver’s license, registering your automobiles and obtaining local license plates, registering to vote in your new state and obtaining a safe deposit box used for valuables and records.

In so far as practical, it is a good idea to find local physicians, attorneys and accountants in the new state and to have your out-of-state records transferred to your new advisors. We also recommend that individuals who wish to retain a home in their prior state consider downsizing, so that the home in their new state is larger than that in the prior state.

Keep in mind that states such as New York will utilize credit card charges, cancelled checks, ATM transactions, telephone records and EZ Pass charges to determine your residency if they decide to audit you.

KEVIN: We also recommend that you update your legal documents, like your will, health care proxy and power of attorney, to reflect your new domicile. Some states, like Florida, allow you to file a Declaration of Domicile with the local government officials. Also, be sure to declare that you are a “resident” of the new state on your state and federal income tax returns. While none of these actions are themselves determinative, they should help to establish a pattern of behavior that may prove helpful should your residency status be challenged.

Q. What are some of the stumbling blocks that may cause a person’s domicile to be challenged by a state?

KEVIN: The number one stumbling block to changing domicile from one state to another would be the amount of time a person spends in a state. It is very difficult to claim that one state is your “domicile” when you actually reside in another state. I’ll share the story of the estate of Joan Rivers as an example of an unclear domicile situation. Joan Rivers lived and owned a home in California, and also owned a home in New York City where she spent significant time.

Ms. Rivers’ will stated she was a resident of New York. But the same document also claimed California to be her place of domicile, where she intended to reside on a permanent basis. Upon her death in 2014, Ms. Rivers’ will was filed with the New York Surrogate Court. While New York imposes a separate state estate tax (at rates of up to 16%), Californians pay no separate state estate tax at death.

CRAIG: While all the details of Ms. Rivers’ estate are not public, some estimates suggested that the estate would have owed New York state estate tax in the tens of millions of dollars if she was deemed to have been a New York state domiciliary at her death. On the other hand, domicile in California would have meant her estate would only be suject to New York state estate tax on assets physically located in New York, which would have been a significant advantage for Ms. Rivers' heirs. It’s a good lesson in the importance of making your domicile clear and keeping your documents up-to-date.

Q. What’s the bottom line?

KEVIN: The short answer is a change in domicile can offer enormous tax relief for some taxpayers and good planning is key. We can help you fully understand the respective states’ tax laws and take the necessary measures to make your move successful.



This communication is intended solely to provide general information. The information and opinions stated are as of October 12, 2017, and may change without notice. The information and opinions do not represent a complete analysis of every material fact regarding any market, industry, sector or security. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process.Historical performance does not guarantee future results and results may differ over future time periods.

IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.

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