FLYING SOUTH FOR TAX PURPOSES

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1 WEALTH PLANNING InvestorView FLYING SOUTH FOR TAX PURPOSES A comprehensive tax plan must consider not only federal gift, estate, and generation-skipping transfer tax, but also state and local income tax and transfer tax rules. Given the great disparity between state income and transfer tax rules and rates, many residents of high-tax states inquire about changing tax residency ( domicile ) to a low-tax state, especially in the year or two before they expect a significant increase in state tax liability. Changing one s domicile is theoretically simple, as domicile is primarily a state of mind. Generally, it is the place where one intends to reside indefinitely. But not surprisingly, state taxing authorities frequently challenge moves that result in a significant loss of tax revenue. We are frequently asked which factors determine whether an individual is domiciled in one state over another for tax purposes. A common fact pattern is an individual who desires to leave his New York domicile behind, and establish a domicile in Florida, and so the rules governing that specific situation, as well as suggested actions to acquire a new domicile are outlined as follows. Keep in mind that while many of these rules apply in other states, it is always necessary to consult a tax attorney in order to determine how best to change domicile from one state to another. In New York, the determination of whether someone is a domiciliary for estate tax purposes is fact-specific, but multiple factors are considered and no one is determinative. This is in contrast to provisions of New York income tax law which states that a non- New York domiciliary may still be subject to New York income tax if he both maintains a permanent place of abode and spends more than 183 days of the taxable year in New York. In general, two factors determine whether a residence is considered a permanent place of abode for tax purposes: (1) the physical attributes of the dwelling, and (2) the nature of the taxpayer s relationship to that dwelling. With regard to the physical attributes, a dwelling must be suitable for year-round use and must contain facilities for bathing and cooking. In determining whether the taxpayer has the requisite relationship to a dwelling, the guidelines have identified certain factors that should be considered, specifically: Whether the taxpayer maintains the dwelling either in money or in kind; whether he has a legal right to the dwelling; whether he actually uses the dwelling or otherwise has access to it; his relationship to other occupants of the dwelling; whether he has separate living quarters or keeps personal items at the dwelling; and whether he uses the address of the dwelling for government or business purposes. While the income tax rules outlined previously have no explicit application to the fact-specific determination of residence in an estate tax proceeding, the New York taxing authorities will look at the totality of an individual s activities, patterns and contacts to try to determine which state appeared to be most significant to the taxpayer at the time of his death. In the absence of conduct on the part of a New York domiciliary showing a clear and definite intent to change domicile to another state, New York will claim that no change in domicile took place and will subject the taxpayer to New York estate tax upon his or her death. Author Alison Hutchinson Vice President Regional Trust Head (New York) 1 Brown Brothers Harriman Quarterly Investment Journal

2 Primary Factors Considered in Determining Domicile Under New York law, the domicile state is the state where a person lives with an intent to make a fixed and permanent home. An existing domicile continues until a new one is acquired, and the burden of proof rests upon the party who alleges a change in domicile to show a present, definite and honest purpose to give up the New York domicile in favor of the new domicile. The New York Tax Department has issued domicile guidelines for its tax auditors that expand upon the above rule. Although the guidelines were issued for use by income tax auditors, they are likely utilized for estate tax audits as well. The guidelines list five primary factors auditors must examine: Home: The individual s continued use and maintenance of the traditional family home in New York compared to the nature and use patterns of a residence in another state. This is a comparison of the size, value and nature of use of the New York residence with the size, value and nature of use of residences in other states. Active Business Involvement: The individual s pattern of employment in each state, including substantial investment in, and management of, any closely-held business. Time: A comparison of the states in which the individual spends time during the year and why, including a comparison of daily expenditures and the type of expenditures made at locations in each state. A diary, appointment log or calendar maintained by the individual may be used to support this analysis. Items Near and Dear : The location of items with significant sentimental value or that enhance the quality of lifestyle, including heirlooms, artwork and pets. Family Connections: The existence of deep and substantial ties with immediate family in New York. Because of the intrusiveness associated with this primary factor, review is generally limited to the spouse or partner and any minor children. The location where minor children attend school can be one of the most important factors in determining where the primary caregiver is domiciled. Ancillary Factors To Be Considered When a Tiebreaker is Needed Where there appears to be a case for New York domicile under one or more of the primary factors, the following ancillary factors may be considered: The address at which bank statements, bills and other financial data are primarily received. The physical location of any safe deposit boxes. The state in which the individual s cars, boats and airplanes are registered, as well as the state in which the individual s driver s license is issued. Where the individual registers to vote and where he physically votes. Whether the individual possesses any state-specific tax exemptions (for example, in New York, a Manhattan Parking Tax exemption), or has applied for school tax relief (the New York STAR exemption). Whether the individual has telephone service in New York or another state and if so, the nature of the listing, the type of service features and the activity at each location. Which domicile is cited in the individual s Will and other legal documents. 2 Brown Brothers Harriman Quarterly Investment Journal

3 Changing one s domicile is theoretically simple, as domicile is primarily a state of mind. Generally, it is the place where one intends to reside indefinitely. But not surprisingly, state taxing authorities frequently challenge moves that result in a significant loss of tax revenue. Suggested Actions to Change Your Domicile Listed below are several actions that may be taken in order to indicate an intent to make Florida, rather than New York, a fixed and permanent home. Once an individual decides New York is no longer his state of domicile, he should consider taking as many of the steps listed below as possible to further evidence an intention to make Florida his primary home. The changes should be effected as close in time as possible with the change in domicile, as New York taxing authorities may discount those changes that take place a substantial period of time prior to or after the purported date of the change of domicile. Family, Social and Political Activities Acquire property and file for homestead exemption in Florida. Dispose of your New York residence and/or spend less than 183 days of the calendar year there. If a New York residence is kept, rent/lease (rather than own) the New York residence, and/or downsize the New York residence you own. If possible, the Florida residence should be the more substantial of the residences owned. Move important personal effects to Florida, including artwork, expensive furniture, heirlooms, pets, collections of books, stamps and coins and other near and dear items. If insured, amend policies to show the new location. Spend significantly more time in Florida than in any other place. Maintain a log of the days spent in Florida as well as travel itineraries. Florida should serve as a base from which extended trips are taken and to which you return after the completion of a trip. When feasible, have family gatherings and social events in Florida. In conversations, indicate that Florida is home. When you register in a hotel or club, use your Florida address. Subscribe to newspapers in Florida and cancel subscriptions in New York. Obtain a doctor and dentist and arrange for and attend annual appointments in Florida. Use personal stationery that reflects Florida address. Make charitable contributions to charities located in Florida. Acquire cemetery plots in Florida. Affiliate with Florida organizations and resign from or become a non-resident member of non-florida organizations, including churches or temples, country or social clubs and political organizations. 3 Brown Brothers Harriman Quarterly Investment Journal

4 Business and Financial Considerations and Filing Suggestions Cease active participation in businesses located in New York, including substantial investment in, or management of, any New York closely-held business such as a sole-proprietorship, partnership, limited liability company or corporation. Notify banks, credit card companies, retail stores, the Social Security Administration and companies or partnerships from which dividends, interest or wages are received to send statements and other correspondence to Florida and to reflect that address on all records. File a Declaration of Domicile in the Office of the Clerk of the Court in the appropriate Florida county. File federal income tax return at the IRS Center in Atlanta, Georgia, which corresponds to Florida. File a nonresident New York income tax return if there is New York based income, unless in New York for more than 183 days in the calendar year. If there is no New York based income, notify New York state and local tax authorities that you have ceased to be a resident and should be removed from the income tax and personal property tax rolls. Mark the last returns you file as final. Do not claim New York State tax exemptions, New York City rent control status, New York City Parking Tax exemption or other New York benefits. Register to vote in Florida and actually vote not only in general elections but also any special elections. Remove your name from voting rolls in New York. Open new bank and brokerage accounts in Florida and close New York accounts unless there is a banking relationship which is prudent to retain. Obtain a driver s license in Florida and relinquish New York license. Acquire automobile license plates in Florida and relinquish New York plates. Reregister automobiles/boats in Florida and relinquish registrations in New York. Execute a new Will which recites Florida as your state of domicile. Execute the Will under Florida state law. Refer to your Florida residence in all trusts and other legal documents. Change address on passport, bills, subscriptions, contracts, deeds, credit applications, leases, insurance policies, hotel registration cards, stock transfer agents, pension fund trustee or agent, attorneys, accountants, telephone directories and social registers. Transfer safe deposit box contents to a safe deposit box in Florida, and close out New York safe deposit boxes unless necessary for safekeeping in New York. Consider making any new investments in real estate or businesses in Florida rather than New York and conduct business in Florida. State taxing authorities are truly attempting to determine where you consider Home, with a capital 'H.' As that determination is made, it is important to put yourself in the best possible situation, as judged by an independent third party. The important take away is this: State taxing authorities are truly attempting to determine where you consider Home, with a capital H. As that determination is made, it is important to put yourself in the best possible situation, as judged by an independent third party. No rational person would conclude that Florida has become Home because you cancelled your subscription to the New York Times, while spending ten months of the year living next to the New York elementary school where your children are all enrolled. That said, where you have homes in more than one state and spend about the same amount of time in both locations, making some of the more minor changes outlined above could ultimately tip the scale in your favor. 4 Brown Brothers Harriman Quarterly Investment Journal

5 NEW YORK BEIJING BOSTON CHARLOTTE CHICAGO DENVER DUBLIN GRAND CAYMAN HONG KONG KRAKÓW LONDON LUXEMBOURG NEW JERSEY PHILADELPHIA TOKYO WILMINGTON ZÜRICH This publication is provided by Brown Brothers Harriman & Co. and its subsidiaries ( BBH ) to recipients, who are classified as Professional Clients or Eligible Counterparties if in the European Economic Area ( EEA ), solely for informational purposes. This does not constitute legal, tax or investment advice and is not intended as an offer to sell or a solicitation to buy securities or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code or for promotion, marketing or recommendation to third parties. This information has been obtained from sources believed to be reliable that are available upon request. This material does not comprise an offer of services. Any opinions expressed are subject to change without notice. Unauthorized use or distribution without the prior written permission of BBH is prohibited. This publication is approved for distribution in member states of the EEA by Brown Brothers Harriman Investor Services Limited, authorized and regulated by the Financial Conduct Authority (FCA). BBH is a service mark of Brown Brothers Harriman & Co., registered in the United States and other countries. Brown Brothers Harriman & Co. and its affiliates do not provide tax, legal or investment advice and this communication cannot be used to avoid tax penalties. This material is intended for general information purposes only and does not take into account the particular investment objectives, financial situation, or needs of individual clients. Clients should consult with their legal or tax advisor before taking any action relating to the subject matter of this material. Brown Brothers Harriman & Co All rights reserved. January PB