The terms “domicile” and “residence” are frequently used interchangeably, but for tax purposes, they are distinct legal concepts that carry different meanings and significance. Residence refers to a person’s place of abode. While individuals may have multiple residences at once, each of us has only one legal domicile that can only be changed by establishing a new legal domicile somewhere else. A person’s domicile is his or her primary permanent residence. It is the place that he or she considers home and intends to return, even while temporarily living elsewhere.
During life, a person’s domicile typically determines the state to which they pay income taxes, although, in certain circumstances, individuals may file income taxes in multiple states. At death, a person’s domicile determines not only where his or her will is probated and where the primary administration of his or her estate will take place, but also the state to which his or her estate may owe taxes. With a wide disparity in estate tax laws from state to state, with some states imposing taxes on estates worth $1 million or more and others having no estate tax at all, a change in domicile can reduce or eliminate estate taxes altogether, saving surviving family members significant assets.
Changing one’s domicile requires a combination of intent to treat a new place as home, and actions that reflect that intent. At minimum, individuals wishing to change their domicile should spend at least 183 days a year in the new home state. Because intent is subjective, however, the more actions a person takes that reflect their intent to treat the new state as home, the clearer the domicile determination becomes. These actions include factors such as where the individual held a driver’s license; where their vehicle was registered; where they were registered to vote; where they owned or leased property; where they visited doctors, lawyers, and other professionals; where their primary social, religious, and charitable activities took place; where their mail was sent; and where they departed from and returned to after vacations.
While the concept of domicile may seem straightforward, determining a person’s domicile can become complex when individuals divide their time between residences in multiple states or countries, or attempt to permanently move from one state or country to another, and have significant ties to more than one place of residence. When these individuals die, questions of domicile can significantly impact both the probate process and the estate’s tax liability, depending on which state is considered the person’s domicile and which is ancillary. Consider the following example:
Alice and Frank owned homes in Hyannis Port, Massachusetts; Chicago, Illinois; and Naples, Florida. They amassed a stock portfolio worth nearly $6 million and each had substantial retirement assets and several bank accounts with a bank in Chicago. After living and raising their children in Chicago for most of their working years, they took steps to change their legal domicile to Florida to enjoy their retirement. They each held Florida driver's licenses and re-registered their cars in Naples, arranged to have mail forwarded to Florida for much of the year, and joined the local Rotary Club. Upon retirement, they diligently spent most of the year in Florida and divided their remaining time between Chicago and Cape Cod, but following Frank’s death two years ago, Alice began spending nearly half the year in Massachusetts, where she has become the director of a local charitable board. She keeps a car in Hyannis Port and has a Massachusetts P.O. box. She continues to see her longtime doctors in Chicago when she is in town, and she votes in Illinois elections. She often travels abroad, departing from and returning to Chicago’s O’Hare International Airport.
If Alice were to die before undertaking a concerted effort to sever ties with Illinois and Massachusetts, she runs the risk of either or both states claiming her as a domiciliary of that state for tax purposes. Both Illinois and Massachusetts impose an estate tax, where Florida does not. If Alice is found to be domiciled in Florida, her estate will be probated in Florida, and will face only those taxes imposed by Massachusetts and Illinois on the portion of her estate that is composed of real and personal property located in those states.
If, however, Alice is found to be domiciled in Massachusetts, the state will impose estate taxes on the entire value of her estate, including her sizable brokerage account, bank accounts, retirement assets, and Massachusetts real estate. In either event, any home that Alice owns in her own name will face probate in the state in which she is domiciled, and ancillary probate in the other two states. With a clearer understanding of the tax consequences of her domicile and several changes to her routine, Alice may be able to reduce or entirely eliminate her estate tax liability.
