Residency Planning as Part of Your Estate Plan

Twelve states plus Washington, D.C. levy death taxes (i.e., estate and/or inheritance taxes). States may impose death taxes on an individual’s entire estate if their domicile is in the state at the time of death. For example, the New York estate tax will apply to the entire estate of a New York domiciliary who passes while on a Florida vacation.

Individuals domiciled in states levying death taxes need to change their domicile to save their beneficiaries the state’s death tax expense. So, what is a domicile, and what planning is necessary to change it? A domicile is defined as an individual’s permanent home – the place they intend to return to when absent. Once established, a domicile continues indefinitely until affirmatively changed. Individuals affirmatively change their domicile by physically moving to a new location with the demonstrable, concurrent intent to make the new house their permanent home.

There is a presumption that an individual’s house is their domicile when they only have one house. Someone who sells their old home, buys a new home, and moves there probably changed their domicile. When an individual owns multiple houses, states will analyze multiple factors to determine their domicile, including:

The home factor presumes that a taxpayer’s “nicest” house is their domicile. This is a subjective analysis and is not entirely based on the houses’ respective values. A $1 million house in Las Vegas can easily be “nicer” than a $2 million co-op in NYC. Since the presumption is a taxpayer’s “nicest” house is their permanent home, an individual who cannot sell their current home and is looking to change their domicile needs to be prepared to acquire a new home that is “nicer” than what they currently have.

When a taxpayer must maintain a house where they are currently domiciled, they should consider downsizing. Downsizing is an exceptionally strong indicator that a taxpayer has changed their domicile because it is a clear reduction in their connection to the state. Furthermore, downsizing allows the individual to claim the IRC Sec. 121 exemption on the sale of the old house.

States presume an individual’s domicile is where they spend more time than anywhere else. This is not a matter of spending less than 183 days in a state. For example, an individual claiming FL domicile and owning homes in NY and FL spent 160 days in NY, 150 days in FL, and 55 days traveling. NY would argue this individual is a NY domiciliary because they spent more time in NY than anywhere else. Furthermore, since the burden of proof for a change of domicile is on the individual, they need to spend more time in the new state than anywhere else by a persuasive margin. Spending 183 days in FL and 182 days in NY is unlikely persuasive, while spending 240 days in FL and 125 days in NY probably is persuasive. Individuals should consider using location tracking applications to manage the number of days spent in each state and adjust travel plans, as necessary.

States presume individuals keep their prized possessions at their domicile. Prized possessions may not have substantial economic value, but always have significant sentimental value (e.g., pets, heirlooms, family photos). Individuals changing their domicile need to document moving prized possessions – which can be challenging because these possessions often fit in the backseat. Documenting the movement of prized possessions includes updating insurance riders, changing vets, and taking photographs (with date stamps and geolocation data) of prized possessions moving into the new home.

The family connections factor presumes an individual’s permanent home is close to family. While the concept that spouses must share the same domicile is passé, states will often presume that an individual’s domicile is in the state where minor children attend school. Individuals with minor children looking to change their domicile may need to make plans to move the entire family or wait until children reach majority.

Active business involvement presumes a domicile is near the individual’s primary workplace. Working individuals looking to change their domicile should be prepared to make a bona fide office in the new state. In the virtual work age, this does not require leasing a fully-fledged office, but working from the kitchen table is insufficient. At a minimum, working individuals should consider coworking arrangements and/or creating a dedicated home office in the new home.

While no one of these five factors is dispositive, to successfully change your domicile all five factors should point to the new house becoming your permanent home. Individuals considering changing their domicile should consult with a professional about their specific facts and circumstances and the steps they should take.