Home Is Where You Hang Your Hat: The Significance of Domicile Planning

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A debtor, regardless of state residence, can seek protection from his or her creditors in the federal bankruptcy courts. However, the state in which the debtor resides or, more accurately, is "domiciled," will determine which assets the debtor may keep and which must be turned over as part of his or her bankruptcy estate.

Similarly, from an income tax perspective, many states, such as New York and Pennsylvania, impose a personal income tax on the taxable income of every person. In the case of a domiciliary, the tax is based upon the federal adjusted gross income, which means all income wherever and however earned. In the case of a nonresident, taxable income is based only on income derived from or connected with sources in that state (i.e., rents received from realty, compensation from a business, trade, or profession or occupation carried on in that state). However, even a nondomiciliary will be considered a resident of that state for state income tax purposes if he (i) maintains a permanent place of abode in that state; and (ii) spends 183 days of the taxable year in that state—the so-called "snowbird tax."

Lastly, although the exemption from the federal estate and gift taxes has now been "permanently" established at $5,250,000, many states that impose a state estate or inheritance tax have not correspondingly increased the exemption for its local transfer tax purposes.

Considering that the state of Florida has no state estate or inheritance tax, nor a personal income tax, the fact that Governor Cuomo and the New York State Legislature are finalizing arrangements to extend a high tax bracket for the state’s top incomes may give New Yorkers pause to consider their annual net tax bill, not to mention the cost of passing their estates on to the next generation.

Similarly, from a financial planning perspective, Florida exempts the following assets from the claims of creditors and, therefore, has protected from inclusion in a federal bankruptcy estate: an unlimited "homestead" exemption for the principal residence; assets held by a husband and wife as tenants by the entireties; qualified deferred compensation plans, including IRAs and 529 college plans; life insurance policies; life insurance proceeds; annuities; and wage accounts. With respect to business property, Florida law specifically limits the rights of a creditor to a partner's interest in a partnership or a member's interest in a multimember limited liability company to a "charging order"—specifically excluding any other form of remedy such as attachment, foreclosure, etc.

For those who are considering a relocation to Florida, or at least establishing Florida as their domicile for tax and/or asset protection planning purposes, the following checklist of suggested steps should be considered to not only manifest an intent to change domicile to Florida but also, as significantly, to abandon domicile status in the former state.

Summary Checklist of Steps to Consider to Establish Domicile

  1. (a) If possible, sell or lease the residence in the former state of domicile.
    (b) If retaining a residence in the former state of domicile and continuing to be actively involved in or perform services with respect to a business conducted in that state, there are cases that hold that an individual has not abandoned the former state as his domicile. However, if the individual is only a passive or inactive investor in a local business (i.e., a limited partnership), case law has held that this issue alone will not be sufficient to challenge a change of domicile.
    (c) If the individual retains a residence and spends more than 183 days in the former state of domicile, he may be taxed as a resident for income tax purposes, even if he claims to have changed his domicile.
  2. Own or lease and occupy a dwelling in Florida and move paintings, sculpture, jewelry and those items which are held "near and dear" to Florida. Move furniture, if appropriate, to Florida. Retain moving receipts. Change insurance policies to show Florida as the primary residence.
  3. Spend as much time in Florida as is practicable and spend more time in Florida than the former state of domicile.
  4. Keep required records to substantiate the number of days spent in the former state. Retain airline, telephone and credit card bills and maintain a diary to prove presence for each day of the year, in the event of an income tax audit.
  5. Transact business in Florida and perform services with respect to a business located in Florida. Discontinue transacting business in the former state of domicile and discontinue performing services in the former state of domicile or with respect to a business located in the former state of domicile.
  6. File in the office of the Clerk of the Circuit Court of the county of the Florida residence a Declaration of Domicile form indicating the change of domicile to Florida.
  7. Register to vote in Florida and actually vote during elections. Cancel voter registration in the former state of domicile. Do not request or return absentee ballots for elections in the former state of domicile.
  8. Claim Florida homestead exemption from real property taxes. The homestead exemption must be filed in person between January 1 and March 1 at the appropriate property appraiser's office. Renewals in subsequent years can be filed by mail. The exemption is available to individuals who are domiciled in Florida as of January 1, and who own real property (including condominiums) in Florida as of January 1.
  9. File federal income tax returns with the appropriate IRS district for a Florida domiciliary. This center is currently Atlanta, Georgia, 31101.
  10. Discontinue filing resident income tax returns in the former state of domicile. It may be prudent to discuss with an accountant the advisability of notifying tax officials in the former state of domicile of change of residence. An individual may still be required to file a nonresident income tax return to the former state of domicile for compensation for personal services rendered in the former state of domicile or for rental income from real or personal property located there.
  11. Change testamentary documents to recite that residence is in Florida and have the testamentary documents reviewed by Florida legal counsel. If possible, execute the will and all related or ancillary testamentary and estate planning documents in Florida, in the presence of Florida witnesses and/or Florida Notary Public.
  12. Pay automobile license fees to Florida by changing the registration of automobile to Florida. Obtain a Florida driver's license.
  13. Transfer bank accounts and securities to Florida. If accounts are maintained in the former domicile, substitute the addresses of bank and brokerage accounts to show the new Florida address.
  14. Move a safe deposit vault to Florida.
  15. Use a Florida address in contracts, deeds, passports and all other legal documents.
  16. Use a Florida address when registering at hotels.
  17. Transfer church or temple membership to Florida.
  18. Join Florida clubs. Change status in out-of-state membership clubs from resident to nonresident. Withdraw membership in any club outside Florida where domicile in such state is a prerequisite to holding such membership.
  19. Give notification of change of address for all charge accounts and credit cards, and for all service providers in the former state of domicile, and notify the post office in the former state of domicile to forward all mail to the new domicile.
  20. Establish relationships with and visit doctors and dentists in the new domicile.
  21. Finally, in order to minimize the question of domicile from being raised by tax authorities in the former state at the time of death for inheritance tax or estate tax purposes, consider eliminating the necessity for local tax waivers and proceedings and eliminating the necessity for ancillary probate by converting real property interests to personal property and by transferring bank accounts and brokerage accounts to Florida.
A. A taxpayer has the burden of proving by clear and convincing evidence that he changed his domicile and abandoned his former domicile. A taxpayer needs to maintain records to establish the change of domicile. If there are substantial facts for and against the change of domicile, a taxpayer will lose the case since he will not have met his burden of proof.
 
B. Intent is the key to establishing domicile, and the following is a general list of the suggested steps one could consider taking in order to manifest an intention to change domicile to another jurisdiction. This list is not necessarily complete, and the feasibility or practicality of any particular suggested action may vary from case to case:

 

For Further Information

For more information, please contact Jerry Wolf or Michael Grohman, any member of the Wealth Planning Practice Group or the attorney in the firm with whom you are regularly in contact.

As required by United States Treasury Regulations, the reader should be aware that this communication is not intended by the sender to be used, and it cannot be used, for the purpose of avoiding penalties under United States federal tax laws.