Special Needs Estate Planning focuses on the need to provide for the special needs of our loved ones with disabilities when we are no longer there to organize and advocate on their behalf. It is essential that we start planning now for the coordination of the legal, financial, and care components that will provide for the maintenance of the quality of life and dignity of the beneficiary of the plan.
Its all about maximizing opportunities and minimizing risks.
The four strategic steps are:
PLANNING - DRAFTING - FUNDING - ADMINISTRATION
Planning - It is important to carefully consider all the factors that impact the individual situation. It is critical to take the time to design a complete plan that takes into account the beneficiary's unique circumstances, and that fully explores all the options available to address his/her special needs. This advance planning could include a professional financial assessment, a public benefits profile, a distribution plan, and the exploring of housing options.
Planning the future of a child or adult with a disability is an enormous challenge. It requires specialized planning and where possible it is wise to incorporate the help of professionals such as financial planners or accountants, public benefits technicians, care coordinators, and yes, attorneys who specialize in this area. Its investing in drawing up the plans for the house before we start building. Remember the old adage, pay a little now (prevention), or pay a lot later (cure).
Drafting - Finding a competent attorney to put together the right documents. This can be difficult, as many are entering the field, but are not familiar with trust law, and public benefit or disability issues.
Funding - A great plan that is has no funds available is useless. It is important to determine accurately the financial need balanced against current resources. Initiating the right strategies now can help to accumulate and preserve funds over the grantor's lifetime.
Administration - This is arguably the most critical step as its 90% of the plan. This covers the execution of the plan. The key to successful administration is the distribution plan set out in the Special Needs Trust. The distribution plan is critical to getting the right people in place with the necessary funds to execute the care plan when you are no longer around to oversee caregivers and hold them accountable.
Another perspective on Special Needs Estate Planning is likening it to the proverbial three legged stool.
PEOPLE - PAPER - MONEY
People - Beneficiary, grantor, trustee, attorney, financial planner, health care providers
Paper - Special Needs Trust, Will, Letter of Intent, Power of Attorney, Medical Directives
Money - Savings, Life Insurance, Gifts from relatives, Retirement Benefits
The right people and the right paper can preserve, enhance and leverage the money. The right paper can preserve both.
None of the individual steps alone, will usually be enough, and some of these steps must be taken simultaneously. It may seem impossibly complicated now, but every journey starts with first steps.
Get information on the basics of good Special Needs Estate Planning
Start gathering the information for what will become a comprehensive future care plan
Find a competent attorney, draft, and put in place the 80% or Basic Plan
History and current statistics indicate we are chronic procrastinators, so it shouldn't be too long before we at the very least have the Basic Plan in place with signed, effective documents.
Reference: www.nami.org
Monday, February 25, 2008
Sunday, February 24, 2008
THE ABCs OF STRETCH IRAs
You can plan to have your heirs inherit your IRA assets.
Can an IRA keep growing for a century or more? In theory, it can. Some people are planning to "stretch" their Individual Retirement Accounts over generations, so that their heirs can receive IRA assets accumulated after decades of tax-deferred or tax-free growth. A stretch IRA can potentially create a legacy of wealth to benefit your heirs, and it could also help to reduce your estate taxes.
Usually, this is a choice of the high net worth investor. Typically, an individual, couple or family has amassed sizable retirement savings – so sizable that they don't need to withdraw the bulk of their IRA assets during their lifetimes.
How does this work? Simply put, a stretch IRA is a Roth or traditional IRA with assets that pass from the original account owner to a younger beneficiary when the original account owner dies. The beneficiary can be a spouse or a non-spousal heir (or in some cases, not a person at all but a "see-through" trust.)1
If the beneficiary is a person, this younger beneficiary will have a longer life expectancy than the initial IRA owner, and therefore may elect to "stretch" the IRA by receiving smaller required minimum distributions (RMDs) each year of his or her life span. This will leave money in the IRA and permit ongoing tax-deferred growth – or tax-free growth, in the case of a Roth IRA.
In fact, since you don't have to take RMDs from a Roth IRA at age 70½, you could opt to let your Roth IRA grow untapped for a lifetime. At your death, your beneficiaries could then stretch payouts over their life expectancies without having to pay tax on withdrawals.2
What options do the beneficiaries have? Well, the rules governing inherited IRAs are quite complex. The explanation below is simply a summary, and should not be taken as any kind of advice or guide.
If you have named your spouse as the beneficiary of your IRA, your spouse can roll over the inherited IRA assets into his or her own IRA after your death (presuming they don't need the money).
If you die before age 70½, your spouse can treat the inherited IRA as his or her own and make contributions and withdrawals. Or, instead of treating the IRA as his or her own, your spouse can elect to begin receiving distributions on either December 31st of the calendar year following your death, or the date that you would have been age 70½, whichever date is later.
If your beneficiary is non-spousal, he or she cannot treat the IRA as his or her own, and cannot make contributions to it or rollovers into or out of it.3 A non-spousal beneficiary can either take the lump sum and pay taxes on it, or transfer the IRA assets to an IRA distribution account.
If your non-spousal beneficiary elects to set up a distribution account and you have passed away before age 70½, he or she must follow either the one-year rule or the five-year rule.
Under the one-year rule, annual distributions are based on the life expectancy of the designated beneficiary and must start by December 31st of the year following the original IRA owner's death. In this way, your beneficiary can stretch out the distributions over his or her life expectancy, which can allow more of the inherited IRA assets to remain in the IRA and enjoy tax-deferred or tax-free growth.
Under the five-year rule, there are no minimum annual distribution requirements, but the beneficiary must withdraw their full interest by the end of the fifth year following the owner's death.
The beneficiary can be determined even after the original IRA owner dies – if there is somehow no named beneficiary, you have until the end of the year following the death of the primary IRA owner to establish one.4 But it is vital to establish a beneficiary during your lifetime: if you don't, your IRA assets could end up in your estate, and that will leave your heirs with two choices. If you pass away after age 70½, the RMDs from the IRA are calculated according to what would have been your remaining life expectancy. If you pass away before age 70½, the five-year rule applies: your heirs have to cash out the entire IRA by the end of the fifth year following the year of your death.2
Things to think about. The decision to stretch your IRA cannot be made casually. A beneficiary must be selected with great care, and there is always the possibility that you may end up withdrawing all of your IRA assets during your lifetime. A stretch IRA strategy assumes that your beneficiary won't deplete the IRA assets, and it also assumes a constant rate of return for the account over the years. It's also worth remembering that stretch IRA planning is based on today's tax laws, not the tax laws of tomorrow.
If you are interested in stretching your IRA, you must find a truly qualified advisor to help you. While many advisors know something of the rules and regulations governing stretch IRAs, look for an advisor with an advanced education in IRA planning.
Citations.
1 investmentnews.com/apps/pbcs.dll/article?AID=/20080501/REG/74256949/1031/RETIREMENT
2 kiplinger.com/retirementreport/features/archives/2006/06/Cover_Jun2006_03_01.html
3 irs.gov/pub/irs-pdf/p590.pdf
4 moneycentral.msn.com/content/Taxes/Taxshelters/P33760.
Tuesday, February 5, 2008
A Change in Domicile to Florida Can Help Minimize Taxes
The below article applies to New Jersey, as well as New York
Retirees who have homes in both New York and Florida may be able to reduce or eliminate New York income and estate taxes, and also reduce the real estate taxes on their Florida home by changing their domicile to Florida. The benefit of doing so has been enhanced by the elimination of the Florida estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went into effect on January 1, 2007
It has been further enhanced by the Florida constitutional amendment that places a cap of 3% on any annual increase in assessments applicable to a Florida homestead, but not to a Florida home owned by a New Yorker.
Retirees who have a substantial securities portfolio have benefited from the 15% federal income tax on stock dividends and capital gains. In contrast, both the dividends and capital gains are subject to New York income taxes at a rate as high as 7%. Similarly, Congress has increased the federal estate tax unified credit to $2 million, while New York continues to impose its estate tax on estates greater than $1 million. The failure of New York to give comparable tax relief has motivated many New Yorkers with homes in both New York and Florida to consider a change of domicile to eliminate New York income and estate taxes in their entirety.
Checklist to Determine Eligibility
Not all retirees who own homes in New York and Florida are eligible to elect Florida as their domicile. Domicile is characterized in the New York tax regulations as the place that an individual intends to be his permanent home and the place to which he intends to return whenever he may be absent. The regulations provide that, once established, a domicile continues until the person moves to a new location with the bona fide intention of making his fixed and permanent home there. A person’s declarations are given due weight, but they will not be conclusive if they are contradicted by conduct. For example, the regulations state that registering and voting in one place is important but not necessarily conclusive. Likewise, the length of time customarily spent at each location is important but not conclusive. A person can have only one domicile. If an individual has two or more homes, the domicile is the one regarded and used as the permanent home.
The leading case in New York was decided by the New York Court of Appeals in 1908 (Matter of Newcomb, 192 N.Y. 238). It remains “good law.” Mrs. Newcomb, during a 30-year period, and until she was 80, was domiciled in New York City. She generally resided during the winter in her home in New Orleans and resided during the summer in her residence in New York City. She wanted to make substantial bequests to Tulane University and was concerned that the will might be contested by her relatives. She consulted with a Louisiana attorney, who advised her to change her domicile by making an express declaration in writing to that effect. She signed a declaration stating that New Orleans was her permanent home and her place of domicile. It was argued that Newcomb resided in New York City and merely visited New Orleans, and that her later visits to New Orleans differed in no material respect from those made earlier. It was also argued that she sought to become a nominal resident of Louisiana merely for the purpose of making a Louisiana will and not for making a permanent home. The court rejected that approach and established the following rules for determining domicile when the retiree maintains two residences:
There must be a present, definite, and honest purpose to give up the old place and take up the new place as the domicile.
Every retiree may select and make his or her own domicile, but the selection must be followed by proper action. Motives are immaterial except as they indicate intention.
A change of domicile may be made through caprice, whim, or fancy; for business, health, or pleasure; to secure a change of climate or a change of laws; or for any reason whatsoever, provided that there is an absolute and fixed intention to abandon one and acquire another and that the acts of the persons confirm this intention.
A retiree may elect between a winter and summer residence and make a domicile of either, provided she acts in good faith.
The right to choose implies the right to declare one’s choice, formally or informally, as he or she prefers, and even for the sole purpose of making evidence to prove what the choice was.
No pretense or deception can be practiced, for the intention must be honest, the action genuine, and the evidence clear and convincing. The burden of proof rests upon the party who alleges a change of domicile.
Demonstrating Intent
Retirees who elect to make Florida their permanent residence should demonstrate such intention in a clear and convincing way by taking as many of the following steps as appropriate:
File a declaration of domicile.
File for a Florida homestead exemption.
Obtain a Florida driver’s license and relinquish a New York license.
Acquire Florida license plates and relinquish New York license plates.
Register to vote in Florida and remove oneself from the New York voting rolls.
File a nonresident, rather than a resident, New York income tax return if there is New York–source income.
File a federal income tax return with the IRS Center in Atlanta.
Transfer safe deposit box contents to Florida and close out a New York box.
Open a Florida bank account.
Change credit cards to the Florida address.
Execute a new Florida will, Florida durable power of attorney, and Florida health care proxy.
Refer to Florida residence in all trusts and other legal documents.
Affiliate with Florida organizations and consider disaffiliation with New York ones.
Have family gatherings and social activities centered in Florida rather than New York.
Affiliate with a church or temple in Florida.
If investing in real estate or businesses, focus on areas in Florida rather than New York.
Transfer works of art, expensive furniture, heirlooms, and other valuable personal items to Florida.
Consider acquiring cemetery plots in Florida.
List the Florida residence as the primary residence on all homeowners insurance.
Turn in any New York resident fishing or hunting licenses.
License pets in Florida.
If a retiree is a New York notary public, resign and become a Florida notary public.
Cancel any New York real estate STAR exemption.
Stay in Florida as long as practically possible each year.
Consider acquiring a larger or more expensive home in Florida, or remodeling or redecorating it, and acquiring a smaller or less expensive home in New York, and document any steps taken in doing so.
If a physician has advised that either extremely cold weather or hot, humid weather may be harmful to the retiree’s health, the physician should document the medical issues accordingly.
A change of domicile from New York to Florida will not save any New York income taxes if the retiree is present in New York in a calendar year for more than 183 days. Taxpayers will be considered “statutory residents” of New York only if they maintain a “permanent place of abode” in New York and are present in New York for more than 183 days. A diary should be kept, and a partial day is considered a full day. Therefore, if a retiree leaves New York at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be considered absent from New York for only one day. In addition to a diary, the burden of proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain as much documentation as possible to support the entries in the diary. Failure to account for a day will be presumed by auditors to be a day inside New York. There are some exceptions to the general rule, such as when a retiree is confined to a New York hospital or is present in New York only to go to or from an airport.
Savings in New York Income Taxes
Certain income derived from, or connected with, New York sources will continue to be taxable in New York even if paid to the retiree after a change of domicile to Florida. For example, New York will tax items such as the distributable share of income from a former law or accounting partnership and rental income from New York real property. New York will not continue to tax income from annuities, dividends, and interest, even if from New York sources, unless the income is from property employed in a business, trade, profession, or occupation carried on in New York. In 1996, Congress passed legislation that prohibits New York from imposing its income tax on any retirement income of an individual who is no longer a resident or domiciliary of New York. To quantify the savings in New York income taxes, taxpayers may want to restate the most recent New York resident income tax return on a nonresident return and include only New York–source income.
Savings in New York Estate Taxes
The amount of New York estate tax is based on the net taxable estate as shown in the Exhibit. The following simplified examples illustrate the magnitude of the estate tax savings that will result from a change of domicile to Florida:
If a former New Yorker has changed his domicile to Florida and dies with net assets of $10 million (none of which are in New York), his estate will pay federal estate taxes of approximately $3,680,000 and no New York estate taxes.
If that same individual had not changed his domicile to Florida and all his assets are in New York, his estate will pay New York estate taxes of approximately $1,067,600. That amount will be deducted on the federal estate tax return and the federal estate taxes will be reduced from $3,630,890 to $3,190,000. Thus, the estate will pay a total of $4,257,600 versus a total of $3,680,000, a difference of $577,600.
If that same individual has changed his domicile to Florida, but at the time of his death owned a home in New York valued at $1 million, his estate will pay a federal estate tax of $3,630,890 and a New York estate tax of $106,760 for a total of $3,737,650. Thus, the estate pays additional net estate taxes of $57,650 because the home is located in New York. Note the computation of the New York tax starts out with a calculation of a New York tax on all assets wherever located and then applies the applicable percentage (one-tenth of $1,067,600).
A retiree dies in New York with an estate of $1,500,000. His estate will pay a New York estate tax of $64,400. There will be no federal estate taxes because of the $2 million threshold (i.e., equivalent to the federal unified credit). If the decedent had changed his domicile to Florida and had no assets in New York, there would be neither a federal estate tax nor a Florida estate tax. If the $1,500,000 included a New York home valued at $500,000, however, then there would be a New York estate tax of $21,465 (one-third of $64,400).
As indicated in the above examples, even if there is a change of domicile, New York will nevertheless impose a New York estate tax on real property and tangible personal property having any actual situs in New York. If retirees decide to change their domicile to Florida, it may be desirable to transfer the New York home to a limited liability company or other similar entity. Because shares of the limited liability company constitute intangible property, they should not be subject to New York estate taxes even though the entity owns real property in New York.
Marriage and Domicile Change
Most married couples have the same domicile. When a change of domicile occurs, both spouses change their domicile at the same time. The primary residence of one is the primary residence of the other. But consider the situation where they have a home in New York and a home in Florida and the wife stays in Florida from mid-October until mid-May and is not in New York for more than 183 days during a calendar year. On the other hand, the husband returns to their New York home one week a month for business reasons while his wife stays in Florida. As a result, he is in New York for more than 183 days in each calendar year, although his wife is not. The husband and wife file a joint federal income tax return. The husband files a resident New York tax return. The wife has no New York–source income and files no New York tax return. The wife has substantial income from her stocks and bonds. The Florida home is titled in the wife’s name. She files a declaration of Florida domicile, registers to vote in Florida, receives a homestead exemption on her Florida home, and follows many of the items on the checklist. As a result, there is a 3% cap on any increase in its assessment. A New York auditor claims she must pay New York income taxes on the dividends and interest she receives because she has not effectively changed her domicile. The auditor points out that her husband retained a significant tie to a New York business and, therefore, she cannot change her domicile to Florida. The auditor cites the New York tax regulations:
Husband and wife. Generally, the domicile of a husband and wife are the same. However, if they are separated in fact, they may each, under some circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation. Where there is a judgment or decree of separation, a husband and wife may acquire their own separate domicile. [20 NYCRR 105.20(i)(5)]
This regulation should be changed. A 2005 decision of the New York Court of Appeals recognizes that spouses can each elect their own domicile (Glenbriar Co. v. Lipsman, 5 N.Y.3d 388). Although the case involved an issue related to a rent stabilized residence in New York City, its reasoning appears to sanction a change of domicile by one spouse while the other remains a New Yorker.
Caveat
A change of domicile makes the laws of Florida, rather than New York, applicable, including marital rights. Although a New Yorker may have the requisite intent to make a domicile change, if challenged, such intent must be demonstrated by clear and convincing evidence, which requires a high degree of proof. The lack of such evidence may result in not only an assessment, but also substantial interest and penalties. Where the result is uncertain, a change of domicile should not be attempted unless the taxes that will be saved are substantial. No change should be made without professional legal guidance.
By Allan R. Lipman
Allan R. Lipman, JD, is a partner in the Buffalo, N.Y., law firm of Lipman & Biltekoff, LLP, and also has an office in Boca Raton, Fla.
Retirees who have homes in both New York and Florida may be able to reduce or eliminate New York income and estate taxes, and also reduce the real estate taxes on their Florida home by changing their domicile to Florida. The benefit of doing so has been enhanced by the elimination of the Florida estate tax and the repeal of the Florida intangible tax on stocks and bonds, which went into effect on January 1, 2007
It has been further enhanced by the Florida constitutional amendment that places a cap of 3% on any annual increase in assessments applicable to a Florida homestead, but not to a Florida home owned by a New Yorker.
Retirees who have a substantial securities portfolio have benefited from the 15% federal income tax on stock dividends and capital gains. In contrast, both the dividends and capital gains are subject to New York income taxes at a rate as high as 7%. Similarly, Congress has increased the federal estate tax unified credit to $2 million, while New York continues to impose its estate tax on estates greater than $1 million. The failure of New York to give comparable tax relief has motivated many New Yorkers with homes in both New York and Florida to consider a change of domicile to eliminate New York income and estate taxes in their entirety.
Checklist to Determine Eligibility
Not all retirees who own homes in New York and Florida are eligible to elect Florida as their domicile. Domicile is characterized in the New York tax regulations as the place that an individual intends to be his permanent home and the place to which he intends to return whenever he may be absent. The regulations provide that, once established, a domicile continues until the person moves to a new location with the bona fide intention of making his fixed and permanent home there. A person’s declarations are given due weight, but they will not be conclusive if they are contradicted by conduct. For example, the regulations state that registering and voting in one place is important but not necessarily conclusive. Likewise, the length of time customarily spent at each location is important but not conclusive. A person can have only one domicile. If an individual has two or more homes, the domicile is the one regarded and used as the permanent home.
The leading case in New York was decided by the New York Court of Appeals in 1908 (Matter of Newcomb, 192 N.Y. 238). It remains “good law.” Mrs. Newcomb, during a 30-year period, and until she was 80, was domiciled in New York City. She generally resided during the winter in her home in New Orleans and resided during the summer in her residence in New York City. She wanted to make substantial bequests to Tulane University and was concerned that the will might be contested by her relatives. She consulted with a Louisiana attorney, who advised her to change her domicile by making an express declaration in writing to that effect. She signed a declaration stating that New Orleans was her permanent home and her place of domicile. It was argued that Newcomb resided in New York City and merely visited New Orleans, and that her later visits to New Orleans differed in no material respect from those made earlier. It was also argued that she sought to become a nominal resident of Louisiana merely for the purpose of making a Louisiana will and not for making a permanent home. The court rejected that approach and established the following rules for determining domicile when the retiree maintains two residences:
There must be a present, definite, and honest purpose to give up the old place and take up the new place as the domicile.
Every retiree may select and make his or her own domicile, but the selection must be followed by proper action. Motives are immaterial except as they indicate intention.
A change of domicile may be made through caprice, whim, or fancy; for business, health, or pleasure; to secure a change of climate or a change of laws; or for any reason whatsoever, provided that there is an absolute and fixed intention to abandon one and acquire another and that the acts of the persons confirm this intention.
A retiree may elect between a winter and summer residence and make a domicile of either, provided she acts in good faith.
The right to choose implies the right to declare one’s choice, formally or informally, as he or she prefers, and even for the sole purpose of making evidence to prove what the choice was.
No pretense or deception can be practiced, for the intention must be honest, the action genuine, and the evidence clear and convincing. The burden of proof rests upon the party who alleges a change of domicile.
Demonstrating Intent
Retirees who elect to make Florida their permanent residence should demonstrate such intention in a clear and convincing way by taking as many of the following steps as appropriate:
File a declaration of domicile.
File for a Florida homestead exemption.
Obtain a Florida driver’s license and relinquish a New York license.
Acquire Florida license plates and relinquish New York license plates.
Register to vote in Florida and remove oneself from the New York voting rolls.
File a nonresident, rather than a resident, New York income tax return if there is New York–source income.
File a federal income tax return with the IRS Center in Atlanta.
Transfer safe deposit box contents to Florida and close out a New York box.
Open a Florida bank account.
Change credit cards to the Florida address.
Execute a new Florida will, Florida durable power of attorney, and Florida health care proxy.
Refer to Florida residence in all trusts and other legal documents.
Affiliate with Florida organizations and consider disaffiliation with New York ones.
Have family gatherings and social activities centered in Florida rather than New York.
Affiliate with a church or temple in Florida.
If investing in real estate or businesses, focus on areas in Florida rather than New York.
Transfer works of art, expensive furniture, heirlooms, and other valuable personal items to Florida.
Consider acquiring cemetery plots in Florida.
List the Florida residence as the primary residence on all homeowners insurance.
Turn in any New York resident fishing or hunting licenses.
License pets in Florida.
If a retiree is a New York notary public, resign and become a Florida notary public.
Cancel any New York real estate STAR exemption.
Stay in Florida as long as practically possible each year.
Consider acquiring a larger or more expensive home in Florida, or remodeling or redecorating it, and acquiring a smaller or less expensive home in New York, and document any steps taken in doing so.
If a physician has advised that either extremely cold weather or hot, humid weather may be harmful to the retiree’s health, the physician should document the medical issues accordingly.
A change of domicile from New York to Florida will not save any New York income taxes if the retiree is present in New York in a calendar year for more than 183 days. Taxpayers will be considered “statutory residents” of New York only if they maintain a “permanent place of abode” in New York and are present in New York for more than 183 days. A diary should be kept, and a partial day is considered a full day. Therefore, if a retiree leaves New York at 6 a.m. on Friday morning and returns at 11 p.m. Sunday night, he will be considered absent from New York for only one day. In addition to a diary, the burden of proof as to the taxpayer’s physical presence can be onerous. The taxpayer should retain as much documentation as possible to support the entries in the diary. Failure to account for a day will be presumed by auditors to be a day inside New York. There are some exceptions to the general rule, such as when a retiree is confined to a New York hospital or is present in New York only to go to or from an airport.
Savings in New York Income Taxes
Certain income derived from, or connected with, New York sources will continue to be taxable in New York even if paid to the retiree after a change of domicile to Florida. For example, New York will tax items such as the distributable share of income from a former law or accounting partnership and rental income from New York real property. New York will not continue to tax income from annuities, dividends, and interest, even if from New York sources, unless the income is from property employed in a business, trade, profession, or occupation carried on in New York. In 1996, Congress passed legislation that prohibits New York from imposing its income tax on any retirement income of an individual who is no longer a resident or domiciliary of New York. To quantify the savings in New York income taxes, taxpayers may want to restate the most recent New York resident income tax return on a nonresident return and include only New York–source income.
Savings in New York Estate Taxes
The amount of New York estate tax is based on the net taxable estate as shown in the Exhibit. The following simplified examples illustrate the magnitude of the estate tax savings that will result from a change of domicile to Florida:
If a former New Yorker has changed his domicile to Florida and dies with net assets of $10 million (none of which are in New York), his estate will pay federal estate taxes of approximately $3,680,000 and no New York estate taxes.
If that same individual had not changed his domicile to Florida and all his assets are in New York, his estate will pay New York estate taxes of approximately $1,067,600. That amount will be deducted on the federal estate tax return and the federal estate taxes will be reduced from $3,630,890 to $3,190,000. Thus, the estate will pay a total of $4,257,600 versus a total of $3,680,000, a difference of $577,600.
If that same individual has changed his domicile to Florida, but at the time of his death owned a home in New York valued at $1 million, his estate will pay a federal estate tax of $3,630,890 and a New York estate tax of $106,760 for a total of $3,737,650. Thus, the estate pays additional net estate taxes of $57,650 because the home is located in New York. Note the computation of the New York tax starts out with a calculation of a New York tax on all assets wherever located and then applies the applicable percentage (one-tenth of $1,067,600).
A retiree dies in New York with an estate of $1,500,000. His estate will pay a New York estate tax of $64,400. There will be no federal estate taxes because of the $2 million threshold (i.e., equivalent to the federal unified credit). If the decedent had changed his domicile to Florida and had no assets in New York, there would be neither a federal estate tax nor a Florida estate tax. If the $1,500,000 included a New York home valued at $500,000, however, then there would be a New York estate tax of $21,465 (one-third of $64,400).
As indicated in the above examples, even if there is a change of domicile, New York will nevertheless impose a New York estate tax on real property and tangible personal property having any actual situs in New York. If retirees decide to change their domicile to Florida, it may be desirable to transfer the New York home to a limited liability company or other similar entity. Because shares of the limited liability company constitute intangible property, they should not be subject to New York estate taxes even though the entity owns real property in New York.
Marriage and Domicile Change
Most married couples have the same domicile. When a change of domicile occurs, both spouses change their domicile at the same time. The primary residence of one is the primary residence of the other. But consider the situation where they have a home in New York and a home in Florida and the wife stays in Florida from mid-October until mid-May and is not in New York for more than 183 days during a calendar year. On the other hand, the husband returns to their New York home one week a month for business reasons while his wife stays in Florida. As a result, he is in New York for more than 183 days in each calendar year, although his wife is not. The husband and wife file a joint federal income tax return. The husband files a resident New York tax return. The wife has no New York–source income and files no New York tax return. The wife has substantial income from her stocks and bonds. The Florida home is titled in the wife’s name. She files a declaration of Florida domicile, registers to vote in Florida, receives a homestead exemption on her Florida home, and follows many of the items on the checklist. As a result, there is a 3% cap on any increase in its assessment. A New York auditor claims she must pay New York income taxes on the dividends and interest she receives because she has not effectively changed her domicile. The auditor points out that her husband retained a significant tie to a New York business and, therefore, she cannot change her domicile to Florida. The auditor cites the New York tax regulations:
Husband and wife. Generally, the domicile of a husband and wife are the same. However, if they are separated in fact, they may each, under some circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation. Where there is a judgment or decree of separation, a husband and wife may acquire their own separate domicile. [20 NYCRR 105.20(i)(5)]
This regulation should be changed. A 2005 decision of the New York Court of Appeals recognizes that spouses can each elect their own domicile (Glenbriar Co. v. Lipsman, 5 N.Y.3d 388). Although the case involved an issue related to a rent stabilized residence in New York City, its reasoning appears to sanction a change of domicile by one spouse while the other remains a New Yorker.
Caveat
A change of domicile makes the laws of Florida, rather than New York, applicable, including marital rights. Although a New Yorker may have the requisite intent to make a domicile change, if challenged, such intent must be demonstrated by clear and convincing evidence, which requires a high degree of proof. The lack of such evidence may result in not only an assessment, but also substantial interest and penalties. Where the result is uncertain, a change of domicile should not be attempted unless the taxes that will be saved are substantial. No change should be made without professional legal guidance.
By Allan R. Lipman
Allan R. Lipman, JD, is a partner in the Buffalo, N.Y., law firm of Lipman & Biltekoff, LLP, and also has an office in Boca Raton, Fla.
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