The impact of domicile to your estate taxes
American society is fairly mobile and Bob and Margaret’s lifestyle doesn’t seem too much different from other retirees who might spend their summer months in a northern state and their winter months in a southern state in order to get the best of both worlds. In fact, we even have a term for them. We call them snowbirds. Still, to all intents and purposes, Bob and Margaret’s domicile, what Webster’s calls their fixed, permanent, and principal home for legal purposes could be argued to be Washington. Maybe.
In the past, snowbirds were typically wealthy individuals but that’s no longer the case and many of the current flock of snowbirds reside in RVs, campers or boats during some part of the year. One of the advantages of this seasonal living is that some people declare their permanent residency in states with lower income tax. But, there are other reasons to declare one state or country as your domicile. Canadian residents for instance may want to continue to receive their national health benefits even if they reside in the United States for much or even all of the year. For legal purposes, domicile and residence are two separate things. It’s possible to have residences in multiple locations even different states or countries; however it is theoretically only possible to have one domicile at any given time.
Under the laws of most states, your domicile can be changed only when you’ve moved to a new state with the intention of making your new home there. Some states make the determination of which state you have your domicile in difficult by making the presumption that an individual did not change his or her domicile. So, why does all this matter? Well because states convey taxes on estates. Let’s look at a well-known case.
In 1869, Joseph Campbell, a fruit merchant started a small canning company with Abraham Anderson, an icebox manufacturer. The two men sold packaged French peas, fancy asparagus and beefsteak tomatoes originally and then expanded their line to include vegetables, jellies, soups, condiments and mincemeat. They hired a chemist by the name of John T. Dorrance, who did something extraordinary. Dorrance invented a way to condense soups and changed the way Americans bought soups and turned that portion of the Campbell Company so profitable that by 1922 the company changed its name to Campbell Soup Company. Dorrance had become so successful at Campbell’s that by 1915 he was the owner. In 1911, Dorrance purchased a residence in Cinnaminson township in New Jersey.
If Dorrance had simply stayed in New Jersey, there wouldn’t be a need for a blog about him on a legal website but Dorrance, who by 1925 was a very wealthy man, purchased Pomona Farms in Radnor, Pennsylvania to move his four daughters to an area where they might finish their educations and eventually find husbands and because his wife thought the New Jersey home was “ugly”. He continued to consider his home in New Jersey as his domicile, presumably to take advantage of much more generous tax treatments.
The law makes no determination about whether or not a choice for domicile is appropriate based on tax purposes. If a domicile was determined strictly by where a person spent the majority of their time before his or her death, Dorrance wouldn’t have ended up a tax law example. In 1930, Dorrance died. He evidently thought that he was in fact domiciled in New Jersey. At least that’s what the state of New Jersey contended. New Jersey was where he had worked since completing his college education. While he lived in Pennsylvania and rarely visited his New Jersey home, his office and business remained in New Jersey, he banked in New Jersey, his legal advisors were in New Jersey, he voted in New Jersey, he served as a commissioner for New Jersey, his motor vehicle registrations and drivers license were from New Jersey, it was in New Jersey that he paid taxes on his personal property and he attended and participated in church activities in New Jersey. There are many demonstrations that Dorrance meant that New Jersey be considered his state of domicile including letters to his attorneys and other business correspondence.
At the time of his death, Dorrance had amassed a fortune exceeding $115 million. Tangible personal property and real estate are taxed where the property is located. But estates aren’t confined to those items. They may include items such as stocks, bonds, and bank accounts. Those items are taxed based on the individual’s domicile. Where your domiciliary is located plays a significant role when it comes time for states to levy estate or inheritance taxes. It also plays a role in determining the validity of wills, the treatment of intestate estates (when an individual dies without a will), how marital property is treated after your death, how a will is probated and whether or not a specific court has jurisdiction. Under the laws of most states, a domicile can only be changed by moving to a new state with the intention of changing your domicile and has little to do with where you actually reside. Although a person can have only one domicile, more than one jurisdiction may claim domicile. Separate taxing authorities can come to different conclusions about your domicile.
And that’s just exactly what happened. Pennsylvania courts decided Dorrance was domiciled in Pennsylvania. Pennsylvania collected more than $14 million in inheritance taxes. His estate appealed to the United States Supreme Court which refused to hear his case. Then New Jersey decided that Pennsylvania had no jurisdiction to levy an inheritance tax and assessed a New Jersey inheritance tax on his estate for over $12 million. Once again his estate appealed to the United States Supreme Court and once again the Court refused to hear his case. The result is that Dorrance died domiciled in two states and paying double the inheritance taxes to a grand total of $26,642,031.
Unfortunately, Dorrance’s case is not the only one addressing the complex issue of domicile. A 1997 Washington state case (re Estate of Jack Franklin Tolson) involved a case in which both Washington and California courts ruled that the decedent had domiciled in their respective states. Unlike Dorrance’s case in which neither state backed down, in the Tolson case the Washington Court of Appeals concluded that California had jurisdiction and accorded California’s courts full faith and credit.
For a mobile society in which individuals may move in and out of a state due to employment, recreation or retirement, the issue of domicile is likely to play a significant role in the handling of an estate. When a person moves to a new residence, the new residence is not automatically considered his or her domicile even if a particular time of returning is not definitively fixed. If more than one residence exists, the individual has the right to select which of those residences should be considered his or her domicile. The key facts in determining where a decedent’s domicile is located may include:
- Residence at time of death,
- Whether the residence is temporary or permanent,
- Maintenance of the residence when unoccupied,
- Burial site,
- Location of home,
- Employment or business engagement,
- Residence for voting purposes, and
- License for state drivers license
Different states have different rules so you need to take steps to establish your domicile to reduce the risk of having more than one state claiming inheritance and probate jurisdiction on your estate. The state of domicile is based upon the intent of the individual. To prove intent, the state will exam actions to determine that intent. Examples of things that you can do to establish your domicile include:
- Drafting a will in the state you wish to establish as your domicile or at the very least amending your will to express that intention. Powers of Attorney and health care proxies should be drafted in accordance with the laws of the state desired as domicile.
- Filing an affidavit of domicile from a financial institution or someone can file an affidavit on behalf of a decedent for the purpose of declaring the decedent’s domicile (although after the fact may be too late) as Washington state.
- Registering your motor vehicle, your driver’s license and to vote.
- Filing your federal and state tax returns as a resident in the new state and filing as non-resident for any taxes in the old state.
- Basing your financial transactions including banking accounts, safe deposit boxes, credit card billing addresses etc on your residence in the state.
- Terminating political activity in the former state and centering all new political activity (including contributions and memberships) in the new state. Sending a resignation to political organizations in the former state.
- Joining organizations such as religious, political and charitable organizations in the new state and sending resignations to organizations in the old one.
For a more complete list of actions that will serve as evidence of intention to change domicile, read this article.