A successful business owner with a large estate passed away in 1976. He had grown up in Texas, moved to California and also lived for many years in Nevada. With a $2.5 billion estate, there were substantial federal and state taxes. While the estate proceedings were held in Nevada, both California and Texas sued to collect state estate tax. The Nevada Court eventually determined that the domicile or personal residence of the businessman was in Nevada. While this was an unusual case with a very large asset value, there are several reasons why you should understand the basic rules of domicile. Where you live can affect both the distribution of your estate assets and your estate taxes. You may be a resident of a given location, but you can only have one “domicile.” Your domicile is your permanent place of residence. 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 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.
Old State Domicile 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. 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.
How to Change Your Domicile In order to change your domicile, there are 10 steps that will indicate you intend to be a permanent resident of your new state.
1. Sell your old home and buy a home in new state. This is a very clear indication that you plan to live there. You also 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.
2. Obtain your driver’s license in new state. If necessary, attend training or education courses related to driving vehicles in new state.
3. Register all of your vehicles, such as your cars, boat or recreational vehicle in the new state.
4. File your final partial tax return in old state. After that, plan to file your income tax returns and pay state income taxes in new state. If the state does not have income tax but has an intangible property tax or other type of tax form, file and pay that tax.
5. Register to vote in the new state. Do not vote again at any time in old state.
6. Close your bank accounts in old state and open new bank accounts in new state.
7. Close your securities accounts in old state and open securities accounts with brokerage firms in new state.
8. Obtain medical advisors and financial advisors in new state. Transfer all of your medical records and financial records to the new advisors.
9. Purchase a cemetery plot or other burial location in new state.
10. Change your passport address or obtain a new passport with the address of your residence in new state.
New State Documents Another important way to show that you are moving to a new state is to contact an estate planning attorney in the new state and obtain new documents. It is desirable to sign a new will, a living trust, a durable power of attorney for healthcare or advance directive and a HIPAA release. All of these documents will demonstrate that you now are intending to be a permanent resident of your new state. If you take the 10 steps and complete your new documents, you can be quite confident that you now have changed your domicile to the new state. If you spend a considerable period of time or still have an active business interest in the old state, you should also make certain that you are keeping track of the exact number of days that you spend each year in the new state and the old state.
If you pass away with a substantial estate, your heirs will be pleased that you have documented your domicile. Please note that the exemptions for estate tax or inheritance tax may be much lower in many states than a future federal estate tax exemption. Therefore, even with a moderate estate, there may be incentive for the state tax auditors to want to collect tax from your estate. Taking these steps and keeping good records is a way of protecting your heirs from the state tax auditors.
Published April 25, 2014 by The Foundation of the Memphis and Tennessee Conferences of the United Methodist Church.
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Paul B. Plant, Esq., Harwell & Plant
225 Mahr Ave., Lawrenceburg, TN, 38464
harwellplant@harwellplant.com | 931-762-7528
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