If you own a residence in another state and you are under the impression that all you need to move your domicile to a “Sunshine State” is to get a Driver’s License with your new mailing address or register to vote, think again.
High-tax states, such as New York, New Jersey, Connecticut and Massachusetts, make it quite complicated and consider a long list of both hard and soft factors that govern domicile and residency.
It is important to realize that domicile controls for estate tax purposes, whereas residency controls for income tax purposes.
Most people are concerned about both to some degree, but particularly for New York residents, the estate tax issue is a big one. In New York, if you have an estate just slightly north of the $5.7M threshold, known as the “cliff”, New York will tax your estate from dollar zero forward.
In line with our focused on foresight theme for 2020, consider this real life story as a lesson to understand the myriad of domicile requirements.
We have a client who passed away recently. We will refer to him as Lou Patterson for illustration purposes.
Lou Patterson thought he had done everything he needed to do to claim Florida as both his residency and domicile, but he didn’t satisfy all of the requirements and New York still considered Lou a New York domiciliary for estate tax purposes.
Lou traveled a lot for work and stayed out of New York adequately to claim Florida residency, over 183 days, the bright-line test for residency. As a Florida resident, he filed as a Florida resident for years, so he assumed he would be a Florida resident for estate tax purposes as well. Turns out, even though his residency transfer was successful for income tax purposes, he failed to cut ties sufficiently with New York for estate tax purposes.
He was found to be a New York domiciliary, based on keeping his house in New York, and maintaining his role as a partner at a New York City investment bank. This decision led to a whole series of tax filings and tax payments that would not have been necessary if he had done just a few things differently.
How does someone learn from this and avoid this financial surprise and headache for themselves? Unfortunately, high-tax states such as NY, NJ, CT and MA do not have a bright line test. Instead, they keep people guessing and have busy auditing departments who use a long list of circumstances to build their cases.
Short of selling everything and leaving the state forever, they do not want anyone to have 100% certainty that they will not have to pay estate taxes, and have been known to find creative ways to enforce domicile such as cell phone geo location records, EZ-pass transactions and credit card transactions.
For those who call two or more states “home”, consider scheduling an appointment with one of our attorneys to discuss how to mitigate your risk based on our experience with many of these cases.
You can also refer to our Residency vs. Domicile Checklist, and our more in depth articles; Snowbirds: Establishing Residency for Income Tax Purposes and Evaluating New York and Florida’s Domicile Laws for Spouses .
February 19, 2020