Many people are confused about the differences in the terms domicile, statutory residence, and residence. However, the distinction can be important. This is because your choice of domicile can have serious ramifications for your estate plan. It may also determine your liability for state income tax.
To clarify matters, your domicile is the state in which you maintain your legal residence. In other words, it is your permanent home—the place to which you ultimately intend to return when you are away. Generally, your domicile is not determined by the length of time you spend in a state. You may establish a domicile the first moment you occupy a property. On the other hand, you may spend years in a temporary home and never call it your domicile. Although you don’t formally register your domicile anywhere, if you want to change it, you should be prepared to convince the authorities of any state that may be negatively affected by the change.
Your statutory residence is the place you live and where you are subject to state income tax. If you are a statutory resident of one state, while claiming domicile in another, your state of domicile may also require you to file a tax return there.
Your residence is the place you actually live. You may have more than one residence, many people do. The term “residence,” by itself, has little or no legal significance.
Potential Estate Planning and Income Tax Consequences
When it comes to estate planning, your domicile can make a significant difference in the size of the estate you ultimately leave your heirs, since some states have estate taxes that exceed the federal estate tax credit. Other variations in state laws may also affect the crucial details of your estate plan. For instance, some states do not allow you to serve as the sole trustee of a revocable trust.
In addition, not all states define property ownership in the same way. Some states allow married couples to own property and income separately, while others¾community property states¾assume you and your spouse share ownership of all assets acquired during your marriage. If you and your spouse have different domiciles, you should investigate the property laws of both states to determine if your property and income is considered to be separately owned or shared. You may also want to look into this if you ever move into, or out of, a community property state.
The jurisdiction where your will is probated is also determined by your domicile. If your domicile is unclear at your death, and several choices are possible, your executor should choose your domicile carefully. Once a domicile has been selected, the executor should also determine if it is necessary to probate your will there. Some states exempt smaller estates and certain property from the probate process.
Your choice of domicile can also affect your state income tax. Your income may be taxed in either your state of domicile, or the state where you earned it, or both. If you change your domicile during the tax year, and both your present and former domiciles tax income, you may have to file partial-year tax returns in both states.
Establishing or Changing Your Domicile
It’s not difficult to claim a state as your domicile. The only requirements are that you must be physically present in the state and you must intend to make that state your permanent home.
Physical Presence. There is no minimum residency required to establish a place as your domicile. Theoretically, only a few minutes would suffice. However, you might need to prove you resided there for several weeks or months if it is ever challenged in court. There is one exception to the physical presence rule: If you marry a person domiciled in another state, you may be able to claim your spouse’s domicile as your own, even if you never visited that state.
Intent. Although you are not required to do any of the following, you may wish to do some or all of them to prove your intent: open a bank account; register to vote; register your car; obtain a driver’s license; purchase property; file a legal notice in a local newspaper; and establish ties to the local community. The most important point is to demonstrate consistency. For example, if you claim Massachusetts as your domicile, it may be best not to register your car in New Hampshire, your former domicile, or to vote in Maine, where you own a second home.
Smart Planning Pays Off
Since your choice of domicile can have a significant impact on your estate plan, and may also affect your state tax liability, consult a qualified tax and legal professional for assistance in determining your most appropriate course of action.