Strategic Use Of Domicile And Residency Laws In Income Tax And Estate Planning For Individuals
Given advances in communication and other technology, global business opportunities, and the ease of travel, it is not surprising that many of my clients live and work all over the United States and the world. Many began their lives as Pennsylvania residents. Others settled in this state to embark on career opportunities or adapt to personal and family matters. Still, others maintain multiple residences and/or offices in various parts of our nation and the world. Career-related moves, family needs, retirement, and climate are some of the factors responsible for such changes over the course of one’s professional and personal life.
How does one make tax sense of — and manage — effective income tax and estate tax planning in the context of a multi-jurisdictional existence? A wise client will seek appropriate legal and tax counsel in planning to strategize and maximize the benefits of such changes from a tax and estate planning perspective. Effective counsel can provide further legal guidance, as well, as to the relative benefits of business taxes, creditor protection, homestead laws, and other legal aspects of the states under consideration.
Your income tax and estate planning efforts in this context are effective if you can fully answer the following questions:
1 Are my Will, Power of Attorney (financial, legal, and medical), Living Will, and any trusts I have created valid in the jurisdiction of my domicile?
2 Do they—or other documents or planning techniques implemented for me– adequately address my ownership of real estate in other jurisdictions?
3 Of what jurisdiction am I a resident for income tax purposes for the current year? For the prior year? For future years?
4 Have I complied with all applicable state laws in filing my annual income tax returns?
5 Do I understand, and am I observing, the necessary formalities in my desired state of domicile/residence (physical presence in the state for at least the required period, voter registration, driver’s license, locations of doctors, lawyers, family, friends, religious community, favorite charities, etc.) to support my legal and tax residence there?
6 Have I effectively disengaged from all other states with which I have contacts, in order to substantiate my non-resident status in those states?
7 Do I understand any legal and tax differences among jurisdictions in their treatment of inherited assets by surviving spouses?
8 Am I retaining adequate records to support my domicile and residency tax planning?
9 Do I have the proper professional advisors (including an estate and tax lawyer) in place to recommend and create an estate and income tax plan for me that will achieve my personal and legal objectives, with optimal tax savings?
While the details of such a planning analysis extend beyond the scope of this article, a comprehensive, rather than piecemeal, approach to this planning is critical. The foregoing questions and the following summary should prove helpful to the thoughtful client contemplating strategic estate and income tax planning in a multi-jurisdictional situation.
The legal concepts of “domicile” and “residency” constitute the core of this planning process. The legal term “domicile” is generally defined as the place where an individual has his or her permanent home, and the place where one intends to return whenever he or she is absent. A state’s statutes, and the case law interpreting those statutes—for purposes of this article, the law of Pennsylvania—often uses “domicile” and “residency” as interchangeable terms. The PA Supreme Court has ruled that domicile must be shown by both intention and conduct, and the burden of proof of a change in domicile is borne by the person claiming such change.
While the definition of domicile is important in determining the state in which one’s Will should be probated, and his or her estate opened at one’s death, it will not preclude the need to commence estate administration in other states in the deceased client owned real estate.
Pennsylvania defines a “resident individual” in 2 ways: (1) an individual who is not domiciled in Pennsylvania but is present in Pennsylvania for more than 183 days in a calendar year, Or (2) a person who is domiciled in Pennsylvania, maintains a “permanent place of abode” in Pennsylvania, and spends at least 30 days in Pennsylvania each taxable year. Thus, if a person is domiciled in PA and maintains a permanent abode in PA, such is enough to render him or her a Pennsylvania resident for income tax purposes. As such, taking the steps necessary to establish residence in a state other than Pennsylvania will not of itself terminate one’s status as a Pennsylvania domiciliary for income tax purposes, and adequate case law in PA supports this caveat.
The tests applied by PA courts with respect to one’s residency at death for PA Inheritance tax purposes are somewhat subjective in nature—and not unlike those discussed above.
Effective estate and income tax planning for the increasing number of clients with multiple residences in, or other personal or professional contacts with, various jurisdictions warrants comprehensive planning with a qualified professional team, including a skilled estate and tax lawyer, and can present strategic opportunities to the savvy client.
An Allentown native, Judith A. Harris, Esquire, LL.M. (Taxation) is an Equity Member of the law firm of Norris McLaughlin & Marcus, P.A., a full service business law firm (including Immigration Law, and a member of the Meritas™ Law Firms Worldwide network) with offices in Allentown, PA, Bridgewater, NJ, and New York City, for which she has chaired the PA Office’s Estate, Trust and Tax Practice Group.
1 See Black’s Law Dictionary 435 (Fifth Ed. 1979).
2 Dorrance’s Estate, 163 A. 303, 309 (Pa. 1932).
3 In re Nomination Petition of Prendergast, 673 A.2d 324, 327-38 (Pa. 1996).
4 72 Pa. C.S. Section 7301.
5 61 Pa. Code Section 101.1 (A “permanent place of abode” need not necessarily be owned by the taxpayer.)