By Phil Cook, Senior Director, Client Relationships & Tax
When it comes to estate planning, it’s vital to know the difference between “domicile” and “residency.” Many use these terms interchangeably, but we’re here to tell you they shouldn’t be. While the difference between the two can be subtle, their implications are far reaching, especially as they relate to taxes. For purposes of estate tax, an individual’s domicile is what is considered. For income taxes, residency is what may be considered. Given each state has varying estate and income tax rates, these factors should be carefully considered for your own situation.
When compared to domicile, residency is more transient in nature. Residency is where you choose to be for a specific amount of time, not forever. While each state has its own set of criteria for determining residency, typical factors are maintaining a residence in the state AND being present in the state on at least 31 days of the current year and 183 days during a three-year period. However, some states, like New York for example, have very unusual criteria where residency can be established without having a residence in the state or even spending a single night in the state. Unlike domicile, you can have more than one residence.
Domicile is connected to where your permanent home is maintained and your intention to return when away. It is the location you are most closely tied to and intend to be indefinitely. Your domicile is supported by your behavior patterns. There is no single factor that determines domicile, instead the courts consider the overall fact pattern including:
Where you maintain a residence in your name
Drivers’ license and voter registration state
The state named in your wills and trusts
Location of your doctor, pharmacy, and lawyer
Your official mailing address including what is listed on your tax return
Community involvement (clubs, charities, etc.)
Where your vehicles are registered
Location of your pets and their veterinarian
For example, let’s say you own three homes, one in Washington, Arizona and Wyoming, respectively. You spend six months of the year in your Wyoming home, four months in Arizona, and two months in Washington. Most of your club memberships are in Washington, and you are an active member of the community in Washington. Additionally, your doctor, dentist, lawyer, and accountant are all in Washington. You intend to sell your Arizona home and split all your time between Washington and Wyoming. Based on your pattern of behavior and intention, the case is strong that your domicile is Washington.
Changing your domicile or state of residence can have potential costs that need to be considered including:
Potentially incurring income tax in your new domicile or state of residence
Becoming subject to state estate tax in your new state of domicile
The cost of having to purchase a new home
Additional non-monetary costs such as changing certain services providers, group affiliations, and putting down roots in a new location
If you have a sizeable net worth, we encourage you to run the math and think through the pros and cons. There is no one-size-fits-all approach to estate planning. But for the right situation domicile planning is a powerful tool in a comprehensive estate plan.
The content and information provided in this document have been prepared by Pacific Trust Company for informational purposes only and are not legal advice. Any information provided (including any training/education) is not intended to create, and receipt of it does not constitute, an attorney-client relationship. All clients are advised to seek advice from their own attorney or accountant to determine the results and best course of action applicable for their own circumstances.
Comentarios