Estate Planning Considerations When Moving to a New State
Alaina B. Davalos also contributed to this blog.
First, individuals can only have one domicile, generally defined as the place where an individual has his or her true, fixed, and permanent home. This is often characterized as “the place you intend to return after any temporary absence.” The establishment of residency and domicile is simple if you spend all, or nearly all, of your time in one state. However, for those splitting time between two states, changing official residency to another state is often a thorny question of law.
When the cold and snow settle in around the northern states, many individuals begin to think about retirement and changing their residences to the milder climates of the deep and mid-South. Those contemplating the “big move” have some practical matters to address from both a tax and estate planning perspective.
In cases where someone splits their time significantly between two states, a facts and circumstances test often applies to determine exact domicile, and it is prudent to take as much action as possible to tilt the scale in favor of any proposed and desired new domicile. This means obtaining new driver’s licenses, registering to vote, registering vehicles in your new state, and creating or changing estate planning documents to your new and preferred state of residency. If you split your time between two states nearly equally, track dates spent in each state via a daily recorded log. These records should be maintained with your other tax records for at least six years.
You should also abandon any real estate tax exemption for homestead or primary residence in your former state and change to the new state if such exemptions or credits are available. You can provide notice to the IRS of the new primary address via IRS Form 8822. As soon as you decide to change residences, you will also want to change social club membership rolls and addresses on brokerage and financial accounts. Finally, depending on the state, you may be able to complete and file a Declaration of Domicile to further substantiate your change in residency. In Florida, for example, a person may manifest and evidence their intent to change domicile by filing a sworn statement in the office of the Circuit Court for the county in which he or she resides.
As you change your state of residence, don’t forget to update your estate plan. Seek the advice of a licensed and qualified attorney in the new state to make sure the estate plan is current. For example, estate planning advance directives, such as powers of attorney and living wills, can often be executed in a state-prescribed or specific statutory format. Using those state-specific documents will not only help substantiate your migration to the new state, but also may make it easier for the agent to exercise authority on behalf of the principal because the document will be more easily recognized by local health care providers and financial institutions.
Additionally, a local attorney can better guide you on your new state’s probate laws, which is the process of validating your will and appointing your executor. Some states, like Florida, are notoriously difficult to deal with when it comes to probate, so you’ll want to make sure you have, and fully fund, a revocable living trust to avoid leaving that headache for your family. Plus, the more difficult the probate procedure, the more legal fees your executor will end up paying, diverting money from your family.
You should also pay attention to estate planning around the family home and other assets that may usually be appropriate for the benefit of a surviving spouse. For example, some states, such as Florida, may have special provisions protecting a surviving spouse’s interest in the couple’s primary residence. Any will or trust provision that attempts to devise or distribute the primary residence using a testamentary instrument would be in violation of these new domicile protections, and would be null and void. Another example of state-specific survivor protection is in Georgia, where the law gives your surviving spouse and minor children the right to petition the court for a “year’s support” following your death. The amount the court will grant as a year’s support can vary greatly and could end up being your entire estate.
Where applicable, consider taking steps to preserve the tax benefit of the full basis adjustment of community property at death. This is especially important when a couple from Wisconsin, or another community property state, changes residency to Florida, or a similar non-community property state. Under a special tax rule, a surviving spouse’s one-half interest in community property is adjusted to fair market value in the same manner as a decedent’s interest in property. Most people call this the “double basis step-up rule,” and preserving this benefit through proper trust planning can result in significant tax benefits for couples who own most of their assets together and whose assets have significantly appreciated over time. The key to such estate planning is to avoid mixing the marital property and the new state separate property by preserving the identity of the community property in a separate and easily identifiable trust over time.
As Benjamin Franklin once said, “By failing to plan, you are planning to fail.” If you are considering a change in residency, it would be wise to seek the advice of qualified counsel who can quickly and easily navigate the turns along way.
Michael T. Cyrs
Senior Director of Wealth Transfer