What You Need to Know!
"Life is very tough. If you don't laugh, it's tough" - Joan Rivers
An individual’s residence and domicile are often narrowly perceived as the same; therefore, potentially missing out on tremendous tax benefits. A significant aspect of the estate administration process is your domicile at the time of your demise, not where you were residing. While you can have multiple residences in various states, you can only have one domicile. Essentially, a domicile is a combination of two factors, the first is residency, and the second, an intent to remain for the foreseeable future. Clients often look to establish residency in a jurisdiction with an attractive legislation for estate planning purposes. Suffice it to say, Florida is considered a tax sanctuary fueled by its superior asset protection climate.
Currently, there are seventeen states that will impose either an estate or inheritance tax for estates that exceed a certain threshold. Individuals located in these states with a considerable taxable estate could be required to pay an estate tax at both the state and federal level. For example, if an individual were domiciled in New York and had a taxable estate of $7 million then they would be subject to New York’s estate tax. The New York estate exemption is currently at $5.93 million, which increases annually for inflation. It is important to note that New York’s estate tax starts at 5% and quickly increases up to a 16% maximum rate. At the present time, the federal estate tax exemption is $11.7 million per individual, but this is subject to change under the Biden administration. Given that this example exceeds the New York estate exemption threshold, the estate would need to pay an estate tax at the state level, but would not have any estate tax liability at the federal level. If this individual had been domiciled in Florida instead of New York, then they would not need to pay estate taxes at either the state or federal level.
For decades Joan River made us laugh but the late comedian had the last laugh as she was able to evade a potential hefty estate tax since she was domiciled in the state of California instead of the state of New York. Joan Rivers resided at her home in California, but had a residence in New York City which she spent a significant amount of time. Ms. Rivers’ will stated that she was a resident of New York, but the document claimed that her place of domicile where she intended to reside on a permanent basis was at her California home. While all the details of Ms. Rivers’ estate are not public, it is estimated that her estate would have owed New York tens of millions of dollars if she were deemed to have been New York domiciled at her death. While relying on a will alone can lead to disastrous repercussions, Ms. Rivers remained fortunate as the state of New York did not contest her domicile.
Expensive lessons have been learned not only on the importance of clearly stating your domicile, but keeping documents current. Domicile requirements vary across state, but a key requirement is that you spend more than half of the year in the state you claim as your domicile. While this is the basis for most state definitions of residency for tax purposes, do not expect state tax auditors to take your word for it. It is imperative to keep a record of the number of days you spent in each state during the year. Make sure you have travel documents to support these claims. If you are interested in claiming a new domicile, the first step is to abandon your old domicile, but not necessarily your old residence. We recommend that you immediately obtain a local driver’s license, register your vehicles and plan to vote in the new state. Make sure to update the address on file for all your bank and investment accounts. It is wise to further support your domicile claim by finding local physicians, attorneys, and accountants.
As Joan Rivers said, “Life is very tough. If you don’t laugh, it’s tough”. Be sure you and your heirs have the last laugh. Now is a great opportunity to review estate planning and legal documents like your trust or will, health care proxy and power of attorney to make sure they are properly updated to reflect changes. Proper estate planning is the best way to keep your family out of court and conflict. We welcome the opportunity to review your documents to make sure the appropriate solution is in place.