An individual's decision to change his or her domicile to Florida is generally driven by personal factors, such as proximity to one's family, retirement, health issues, a new job, or a change in climate. In addition to a pleasant climate, Florida offers favorable tax laws and asset protection opportunities that make it an even more appealing permanent home.
This article addresses tax and asset protection motivations for making Florida one's domicile and important considerations when changing domicile.
TAX MOTIVATIONS FOR CHANGING DOMICILE
Florida is traditionally viewed as a "tax-friendly" state because it does not impose estate, gift, income, intangibles (as of January 1, 2007) or generation-skipping transfer ("GST") taxes, while other states, such as New York, impose estate, income and GST taxes and other states, such as Connecticut and North Carolina, impose estate, gift and income taxes.
Estate Tax. Prior to the Economic Growth and Tax Relief Reconciliation Act of 2001 ("EGTRRA"), a state death tax credit was applied against the Federal estate tax for death taxes paid to a state. Florida's estate tax system was a "pick-up tax," such that the estate tax paid to Florida equaled the state death tax credit allowed under the Internal Revenue Code. Thus, a Florida resident who did not own any property outside of Florida did not pay any "additional" state estate tax.
Under EGTRRA, the state death tax credit was phased out so that, beginning in 2005, it was repealed and replaced with a deduction. Accordingly, absent a change in Florida law (by a constitutional amendment) or the reimplementation of the state death tax credit, Florida no longer imposes an estate tax.
Similar to Florida, prior to EGGTRA, New York's estate tax regime was also a pick-up tax. After EGTRRA, some states, including New York, concerned with loss of revenue resulting from the elimination of the state death tax credit, "decoupled" from the Federal system in order to preserve the tax dollars they would otherwise have lost. New York's estate tax is now calculated based upon Federal law as it existed in 2001, allowing a maximum estate tax exemption of $1 million, which is lower than the $2 million Federal estate tax exemption currently available. Moreover, the top New York estate tax rate is currently 16%. Therefore, if a New York domiciliary dies in 2007 with a $2 million gross estate, there will be no Federal estate tax liability but there will be New York estate tax liability in the amount of $99,600. The New York estate tax liability is permitted to be taken as a deduction, effectively reducing the New York estate tax rate to approximately 8.8%. The New York estate tax liability (and those of other similar states) can become significant as the disparity between the Federal gross estate and the amount of New York's estate tax exemption grows. In comparison, the estate of a Florida domiciliary who did not own any property in a state other than Florida will not have any state estate tax liability.
It is important to remember, however, that although the estate of a Florida domiciliary no longer pays any Florida estate tax, that Florida domiciliary estate may still have to pay state estate taxes to other states in which the decedent owned real or tangible personal property. For example, if a Florida domiciliary who dies in 2007 with a $6 million gross estate owned real property in New York with a $3 million value for estate tax purposes, there will be a Federal estate tax due in the amount of $1,685,070 and a New York estate tax due in the amount of $255,400. Again, this New York estate tax is allowed as a deduction in calculating the Federal estate tax liability.
Income Tax. Florida's Constitution prohibits the imposition of an income tax. Many individuals, although domiciled in Florida, often have a second home in states that impose an income tax, such as New York. An individual who is not domiciled in New York for estate tax purposes could be considered a New York resident for income tax purposes, as further discussed below.
Gift Taxes. Florida does not impose a gift tax while Connecticut, Louisiana, North Carolina and Tennessee do impose a gift tax. Connecticut's gift tax is imposed on all gifts if the cumulative lifetime gifts exceed $2 million. Louisiana's top gift tax rate is 3%, and, in addition to an annual exclusion of $11,000, Louisiana provides for a $30,000 lifetime gift tax exemption. North Carolina's top gift tax rate is 17%, and, in addition to allowing a $12,000 annual exclusion, North Carolina provides for a $100,000 lifetime gift tax exemption. Tennessee's top gift tax rate is 16% and there is a $12,000 annual exclusion.
GST Taxes. Florida does not impose a GST tax while Illinois, Massachusetts, Nebraska, New York and Vermont do impose this tax. Each state's statutes should be consulted to determine whether a GST tax will be imposed and whether there is, and the amount of, a state exemption. New York, for example, imposes a GST tax based upon Federal tax law as it existed in 1998 and has a $1 million GST tax exemption.
ASSET PROTECTION MOTIVATIONS FOR CHANGING DOMICILE
Florida law affords its residents a significant level of creditor protection. Proper planning becomes critical to ensure that an individual's assets are protected from creditors and that the maximum amount of a decedent's assets is available for his or her beneficiaries.
Homestead Property. Section 6 of Article VII of the Florida Constitution exempts from the claims of creditors real property that is classified as homestead property. Florida's homestead exemption statute protects the home of a Florida resident from forced sale in order to satisfy his or her creditors. The homestead laws can be classified into three categories: (1) homestead for descent and distribution purposes; (2) homestead for property tax purposes; and (3) homestead for asset protection purposes. This article addresses homestead protection for asset protection purposes.
Florida's constitutional homestead protection is limited to the extent of one-half acre if the residence is located within a municipality. If the residence is located outside a municipality, homestead protection is limited to 160 contiguous acres. This acreage limitation may not be reduced without the owner's consent by reason of subsequent inclusion in a municipality.
There are three exceptions under the Florida Constitution that apply to permit a forced sale of a homestead: (1) payment of taxes and assessments thereon; (2) obligations contracted for the purchase, improvement or repair thereon; or (3) obligations contracted for house, field or other labor performed on the property.
Life Insurance Proceeds. Section 222.13 of the Florida Statutes provides that life insurance proceeds inure to the exclusive benefit of the beneficiary and are exempt from creditors of the insured unless the insurance policy or a valid assignment provides otherwise. Other states are not as clear. For instance, Section 3212(b)(1) of New York's Insurance Law affording creditor protection varies depending upon whether the debtor is the insured, the beneficiary or a combination thereof.
Cash Surrender Value and Annuities. Section 222.14 of the Florida Statutes exempts from the reach of creditors the cash surrender value of life insurance policies insuring the life of a Florida resident and the proceeds of an annuity contract issued to a Florida resident.
Retirement Benefits. Section 222.21 of the Florida Statutes provides that money or other assets payable from a qualified retirement or profit-sharing plan are exempt from claims of creditors of the beneficiary and participant.
Medical Savings Accounts and College Funds. Section 222.22 of the Florida Statutes provides that assets set aside in a medical savings account, college trust fund or plans established under Section 529 of the Internal Revenue Code of 1986, as amended, are also protected from creditors.
Tenants by the Entireties Property. Tenants by the entireties is a form of ownership that only exists between husband and wife. Creditors of either the husband or wife cannot reach this property. In Florida, in order for creditors to attach property held as tenants by the entirety, the creditor must be a creditor of both the husband and wife. When the IRS is a creditor, the protection afforded property owned as tenants by the entirety may be limited.
IMPORTANT CONSIDERATIONS WHEN CHANGING DOMICILE
State Estate Tax. As mentioned above, one of the considerations in changing domicile is the state estate tax that may apply. Regardless of whether the new state of domicile has an estate tax, the individual's estate may be subject to estate tax in the former state (or any other state) in which he or she owns real or tangible personal property. Thus, when an individual moves to Florida, it is important to consider what types of property he or she is leaving behind that may cause the imposition of a state estate tax in the departed state. Generally, real property and tangible personal property have their situs in the state where they are located, rather than in the state of the individual's domicile. There are techniques that can be used to avoid the imposition of state estate tax in non-domicile states because of the ownership of real or tangible personal property located in those states.
First, the individual could gift such property to the intended recipients of the property. Under this alternative, the individual's advisor should consider whether any state gift tax could apply in addition to any Federal gift tax implications. Moreover, the individual should not retain the right to use the gifted property, either directly or indirectly, in order to ensure that the value of the property is not included in his or her estate for estate tax purposes.
Second, the individual could sell such property to the intended recipients. If a sale is consummated, the terms of the sale should be similar to an arms-length transaction that would occur between unrelated parties. Moreover, the terms of the transaction must be respected on a going forward basis. For example, if property is sold for a note, interest much be charged and actually paid. Similarly, if the seller continues to use the property, fair market value rent should be paid.
Third, the individual could contribute such property to an entity, such as a limited liability company or limited partnership, which should convert the tangible personal property to intangible personal property. Intangible personal property is subject to state estate tax in the individual's domicile state.
State Income Tax. As mentioned above, an individual who is not domiciled in a state such as New York for estate tax purposes, could still be considered a New York resident for income tax purposes if he or she spends the statutorily defined amount of time in New York. New York and some other states have residency audit guidelines that are used by auditors to determine an individual's domicile. There is also an agreement amongst various northeastern states in which the signatory states have agreed to apply uniform criteria to determine an individual's domicile. The signature states to the North Eastern States Tax Officials Association Cooperative Agreement on Determination of Domicile dated October 1, 1996 are Connecticut, Delaware, District of Columbia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey and New York.
A non-New York domiciliary or resident with income generated from property located in New York or a business located in New York will be subject to New York income tax. Income from intangible personal property, such as dividends or interest, are considered New York source income to the extent the income is generated by property used in a business, trade, profession or occupation carried on in New York.
For individuals contemplating changing their domicile to Florida who are currently residing in a jurisdiction that has a city and/or state income tax (the combined effect of which can exceed 10% annually), as well as an estate tax (with tax rates approaching 16% in states such as New York), the tax cost of remaining a resident in that jurisdiction can be significant. To ensure that the Florida domiciliary will not be subject to New York income tax, care must be taken to (1) sever all ties to property that will generate New York source income; (2) spend no more than 183 days in New York State in each calendar year; and (3) act in a manner that will not subject them to treatment as a New York resident pursuant to the New York State residency audit guidelines.
Qualification as Homestead Property. An individual is required to take affirmative steps to qualify his or her home as homestead property. In order to be entitled to the homestead exemption, the debtor/decedent must intend to permanently reside in Florida. For example, for property to qualify for the homestead exemption in Florida, an individual must have legal or beneficial title in equity to the real property on January 1, reside on the property and in good faith make the property his or her permanent residence (or the permanent residence of others who are legally or naturally dependent upon such person).
In addition, the manner in which the home is titled is very important. Florida law requires the residence to be owned by a natural person, not by an entity. Many estate planning attorneys favor the use of revocable trusts as an integral part of an estate plan in order to avoid probate. Estate planners should be conscious of the issue regarding whether a residence is owned by a natural person when title is held by the Trustees of a revocable trust. In general, if the homestead is owned by a revocable trust, for asset protection purposes, it should be treated as owned by a natural person. However, one Bankruptcy Judge, in Crews v. Bosonetto, has decided otherwise, holding that homestead property owned by a trust was not protected from a creditor pursuant to Florida's homestead laws.
Factors that Show Intent to Establish Domicile. Individuals who decide to change their domicile to Florida should take steps to ensure that the new domicile will be respected. The best proof of a person's domicile is where he or she says it is. However, courts and taxing authorities often look to objective factors in analyzing proof of intent. In order to demonstrate the intent to change one's domicile, individuals should take the following actions:
(1) File a Florida Declaration of Domicile in the Office of the Clerk of the Circuit Court in the county in which he or she resides.
(2) File a declaration of non-domicile with the state and county of former residence, if available.
(3) On or before March 1st, he or she should apply for the Homestead Exemption for his or her Florida residence.
(4) Declare in his or her Will, Codicil or Trust that he or she is a legal resident of the State of Florida.
(5) Register to vote in Florida and vote as soon as he or she is eligible.
(6) Transfer all bank accounts, safe deposit boxes and securities to a Florida bank (safe deposit boxes in Florida are not sealed by the state upon death of a lessee or co-lessee).
(7) Register his or her automobiles and boats, if applicable, in Florida and obtain a Florida "unrestricted" driver's license.
(8) File his or her Federal income tax return with the IRS in Atlanta using his or her Florida address.
(9) State that he or she is a resident of Florida in all business transactions and charitable activities, and when traveling out of state, he or she should register as being from Florida and give a Florida address even if only a post office box.
(10) Change the address on all credit cards and insurance policies to his or her Florida address.
(11) Change social, religious and other national organization memberships to Florida affiliations or branches and register as a non-resident member with former organization if possible, and keep a low profile in the organization(s) in the former state of domicile.
(12) Move brokerage account(s) to a Florida broker.
(13) Move pensions to Florida, if possible.
(14) Remove telephone listing from phone book in former state of domicile- he or she may have an unlisted number that may be given out through information.
(15) He or she should be very careful not to use credit cards, bank accounts, telephones, make airline reservations or use country clubs in the former state of domicile in such a way as to raise any question as to the duration of time spent in that state versus Florida. He or she should never request any discount available only to residents of the other state, e.g., school tuition, state senior citizen discounts.
(16) He or she should consider placing real estate in the former domicile state in a Florida revocable living trust, limited liability company and/or a partnership or other entity.
(17) He or she should own or lease and occupy a dwelling in Florida. If her or she leases a dwelling, the lease should be at least twelve (12) months in duration.
(18) He or she should spend as much time in Florida as is practicable (preferably at least six months and a day) and should keep a diary of days spent in each location.
(19) He or she should consider shifting charitable giving from organizations in state of former domicile to organizations in Florida.
(20) He or she should, if possible, move his or her immediate family, i.e., spouse and dependents, to Florida.
Florida's tax laws make it an attractive haven for individuals who wish to ease or eliminate tax liabilities. It is extremely important for individuals to sever ties with the former state of domicile in order to effectively change domicile to Florida. If careful attention is not paid, there could be significant unintended tax consequences incurred in the state of former domicile.
The asset protection afforded Florida domiciliaries also makes Florida an attractive state to which to relocate. It is particularly important for individuals to take the appropriate steps to make sure that their home qualifies for homestead protection.