APRIL 2015 NEWSLETTER

SHOULD YOU CHANGE YOUR DOMICILE TO REDUCE YOUR DEATH TAXES?

For most Americans, the Federal Estate Tax will not be a concern at the time of their passing. The current amount that can be given by a person at death free of federal estate taxes is $5,430,000 and for a married couple, this totals $10,860,000. Any amount that exceeds the exemption is taxed at a maximum federal rate of 40%. However, if you live in one of the nineteen states with an Estate or Inheritance tax, you may want to consider becoming domiciled in that state without either of these death taxes.

STATE DEATH TAXES

States that have no estate or inheritance tax at all include: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Idaho, Indiana, Kansas, Louisiana, Michigan, Mississippi, Missouri, Montana, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, South Dakota, Texas, Utah, Virginia, West Virginia, Wisconsin, and Wyoming.

Tennessee’s estate tax will be phased out in 2016 and Maryland and New York will eventually have their estate tax exemptions mirror the federal exemption, which is scheduled to occur in 2019. Iowa, Nebraska, and Kentucky have only inheritance taxes which can range from 0% to 18% depending on who the bequest is made to.

New Jersey has arguably the harshest estate and inheritance tax regime in the entire country. For estates that exceed $675,000, estate tax must be paid and the rate can range from 0.8% to 16% depending on the size of the estate. Additionally, an inheritance tax must be paid based on the class of beneficiaries you have bequeathed your estate to. For example, children, parents, and spouses are exempt from inheritance tax but transfers to almost everyone else are subject to inheritance tax ranging from 11% to 16%.

Pennsylvania no longer has an estate tax but imposes an Inheritance Tax on transfers to everyone except your spouse. Transfers to lineal descendants (children and grandchildren) are subject to 4.5% tax, siblings are taxed at 12% and everyone else is subject to a 15% inheritance tax rate.

Even if you have an estate that will not be subject to the Federal Estate Tax, you could still save a considerable amount of your estate for your beneficiaries by considering being domiciled in a state where there are no death taxes, such as Florida. If you have a $5,000,000 net estate in Pennsylvania and you leave everything to your children, your death tax bill will be 4 approximately $225,000 and that same estate in New Jersey would pay close to $290,000 in death taxes. If you think your estate will have to pay significant state estate or inheritance taxes, you may want to consider being domiciled in a state with no death taxes, especially if you have a winter home in the southern United States.

ESTABLISHING NEW DOMICILE

Almost every state in the southern half of the United States has neither estate nor inheritance tax so establishing one of those states as your legal domicile may result in significant tax savings for your estate. A person can be a resident of several states if they have homes in several states but you can only have one legal domicile. The key is making sure that you meet all the requirements for legally changing your domicile. It is not as simple as buying a house in Florida and spending a few months there each winter.

INTENT TO ESTABLISH NEW DOMICILE

You must have an honest and bona-fide intent to establish a new domicile and give up the other state as your legal domicile. Generally, a domicile is characterized as the place where you intend to make your permanent home and the place where you intend to return to after you have been absent. However, your desire to change your domicile can be for any number of reasons and still qualify as legal intent to create a new domicile. Reasons such as health, business, pleasure, better climate, better laws, or for any other reason whatsoever are sufficient reasons to desire to establish a new domicile. Regardless of why you are choosing to change your domicile, the burden of proof will be upon you or your estate if your new domicile status is challenged.

EVIDENCE OF INTENT TO ESTABLISH NEW DOMICILE

There are several steps that you should take in order to legally establish a new domicile. You should first establish a permanent residence in your new home state, for instance, Florida. If you own the home you live in Pennsylvania or New Jersey it is also recommended that you should own your home in Florida. Renting an apartment may make it seem like you do not intend to permanently move to Florida. One change to consider is selling the family home in Pennsylvania or New Jersey and downsizing to a smaller home in that state. You do not want it to seem like your Florida home is actually your winter vacation home because it is so much smaller in size than the home you are maintaining in your old state.

If you plan to split your time between the new and old state, you will need to avoid the appearance of intent to continue having your old state as your permanent home. Part of establishing domicile in Florida will be acquiring a new permanent residence there but you also must spend the “majority” of the year there. When assessing whether a person is domiciled in one state or another, tax auditors will always look at the number of days spent in a state. Most states operate under the rule that you are domiciled in their state if you are there for more than 183 days in a year. If you think you will be spending close to half the year in each state, you should keep a detailed calendar of when you arrived in and departed from each state as many states will consider any time spent in their state as a full day toward the 183 days necessary to tax you as a domiciliary of that state. If you are traveling from one state to another frequently, you should also keep records of your travel such as airline reservations or toll receipts.

After securing a residence in Florida you should obtain a Florida declaration of domicile, a Florida homestead exemption and a Florida drivers license. You should also be sure to name Florida as your domicile in your Will, Trust, Durable Power of Attorney and Health Care Proxy. Other records that support your domicile status in Florida include:

1. Voter Registration Cards;

2. Vehicle and Boat Registrations;

3. Obtaining memberships in clubs, charitable organizations, and religious institutions in Florida and discontinuing affiliations in the old state;

4. Transferring all bank accounts and safe deposit boxes to Florida;

5. File income taxes and personal property taxes in Florida;

6. Change to non-resident status for tax returns filed in old state for income still earned there;

7. Transfer all professional licenses;

8. Find medical providers in Florida;

9. License pets in Florida;

10. Change credit cards to Florida address;

11. Affiliate with a church or temple in Florida; and,

12. Change all document such as passports.

You may also want to consider having family and social gatherings in Florida and transferring all your valuable items of artwork and furniture to your home in Florida. Furthermore, if part of your decision to move to Florida permanently is for health reasons, you may want to have your physician document that he has given you that advice.

Making all these changes will work in your favor if you are ever challenged on your new domicile on your income tax return or if your Estate has to file an Estate or Inheritance Tax return for property retained in the state of your former domicile. It is more likely that your domicile status will be challenged on an income tax return filed during your lifetime as the old state will likely want to continue taxing all your income instead of just the income earned in that state. If you successfully overcome a challenge to your domicile during your lifetime, you will also likely prevail if there is a challenge on the taxability of your estate as your estate will be able to show that you have been filing income tax returns as a resident of Florida for several years.

If you are concerned about the estate or inheritance taxes in the state where you currently live, an experienced estate planning attorney can help you determine how a move to a new state could affect your estate and reduce death taxes and how to establish domicile in your new state.