By Ron Dorner
“Of course, I know where I live!” you say. But what’s important is not where you think you live, but where state governments determine you live.
The issue is complicated. If you have always lived in one state, owned no property in another state, and intend to die in the state you have always lived in you don’t need to read further. However, many of us have lived in, or plan to live in, more than one state, or have owned or will own property in more than one state. This article is for you.
State governments are looking for more sources of income and are becoming more determined to keep you on their income and estate tax ledger. Your legal domicile is becoming much harder to prove.
Relocating or changing your domicile to some states can eliminate income taxes and/or estate taxes. If you plan to make seasonal treks out of state you need to prepare carefully. This process is a two-sided equation. You must establish a residence in the new state and be eligible for the various financial advantages it offers. You must also sever enough ties in the prior state that tax authorities will have no claim against you.
Deborah Jacobs, writing for Wealth Manager, gives the following list state tax auditors use: Do you spend at least 183 days per year in state? Do you own a home there? Are you registered to vote in state and cast ballots? Are you licensed to drive and have a vehicle registered in state? Are your federal tax forms and passport addresses in state? Do you file state income tax forms (if state has income tax)? Have you established professional relationships (doctors, etc.) in state? Have you set up a burial site in state? Have you joined a local church, clubs, and organizations? Have you moved your safe-deposit box in state?
This list is not a guarantee that you will not have domicile issues. Here are several rules of thumb to follow:
If the state you are leaving is a high tax state, such as New York or Massachusetts, use every possible method to insure you clearly sever your residency ties to that state. The larger your asset base and income, the more critical it is that you carefully handle this situation. I would advise legal assistance if you have an income stream or own significant assets in the prior state.
Even if you have successfully moved your domicile, upon your death real property residing in another state can create an estate tax liability. There are several means to avoid this, one of which is to hold that real estate in a partnership or limited liability company. Again, the advice of an attorney would be appropriate.
If you change domiciles, remember to have your will or trust reviewed by a local attorney in your new state. While these documents are generally honored in your new state, often there can be minor problems or you may be able to take advantage of some of the new state’s estate laws.
Almost every estate planning document has a clause which says, ” the laws of (state where will was drafted) will apply.” Think about that for a minute. Do you see where that clause might cause grief for your executor?
The more we acquire, the more effort it takes to keep it. Solomon must have felt frustration when he uttered, “For what hath man of all his labor, and of the vexation of his heart, wherein he hath labored under the sun?” (Ecclesiastes 2:22).
Ronald Dorner is director of Biblical Money Management. BMM has been helping believers handle their finances and estate planning biblically since 1984. Online counseling is available at www.BiblicalMoneyManagement.com.