Domicile Planning — Don't Take it for Granted
Every day, attorneys, accountants, and other professionals across Florida interact with clients or potential clients who could benefit from domicile planning. Because clients rarely engage attorneys or other professionals with domicile planning in mind, many opportunities to properly plan for domicile are missed. If the right questions are asked at the right time, however, steps may be taken to avert possible disaster and maximize outcomes for clients and their families.
What Is Domicile?
While there is no universally adopted definition of domicile, the states (and the IRS) share a general understanding of what domicile means. In Florida, [a] legal residence or "domicile" is the place where a person has fixed an abode with the present intention of making it his or her permanent home. Once established, a domicile continues until it is superseded by a new one. A domicile is presumed to continue, and the burden of proof ordinarily rests on the party asserting the abandonment of one domicile to demonstrate the acquisition of another.1
A Massachusetts court recently determined that domicile is where a person has "his home—that is, his dwelling place and the center of his domestic, social, and civil life."2 While these definitions are inexact and difficult to apply, they sufficiently allow the attorney or other professional to identify clients with domicile planning issues.
Who Needs Domicile Planning?
Clients in need of domicile planning may be broken down into three distinct groups: those with a changing domicile; those with a changeable domicile; and those with an ambiguous domicile. Clients with a changing domicile, such as older clients retiring to Florida, professionals moving because of job relocation, and non-U.S. citizens moving to Florida for a variety of personal, financial, or political reasons should stand out as candidates for domicile planning. Clients with a changeable domicile, such as part-year residents who could adopt a Florida domicile with relatively little effort, are more difficult to identify because they may not have given any thought to the advantages of changing domicile. Clients with an ambiguous domicile, a group which includes clients who have taken insufficient steps in an intended domicile change or have inadvertently accumulated significant indicia of domicile without an intent to change, are perhaps the most difficult to identify, but also have the most to gain from domicile planning. Each group presents special opportunities and challenges.
Choosing a Domicile
Domicile planning consists of determining the appropriate domicile and taking steps to document the choice of domicile. While it may be tempting to assume that every domicile planning candidate simply needs to clarify or adopt a Florida domicile, a Florida domicile may not be the best choice, depending on the client's circumstances. As a result, once a client with a changing, changeable, or ambiguous domicile is identified, the first step is to determine which domicile is the most beneficial. Once all of the implications of domicile change are known, a client may wish to postpone or even reverse domicile change.
Most clients with sufficient Florida contacts should be advised to change to Florida domicile. Florida is widely recognized as a tax-friendly state, and many clients may wish to avoid the state income, gift, or estate taxation levied by their previous states of domicile.3 Other clients may benefit from favorable Florida creditor protection laws, including creditor protection for homestead, annuities, and cash value of life insurance policies.4 Clients who own valuable residential real property in Florida should consider the effect of the homestead "Save Our Homes" cap on property tax increases.5 Some non-U.S. citizens should be advised to establish Florida (or at least U.S.) domicile since they would otherwise be facing federal estate tax on U.S. situs assets with only a very limited credit to offset the tax.6
Other clients may wish to actively avoid Florida domicile, at least temporarily. For example, many clients desire to retain partial avoidance of federal capital gains tax on the sale of an out-of-state residence (if the residence was the primary residence two out of the five years prior to sale).7 Other clients who are unwilling to sufficiently cut ties to non-Florida domicile, or wish to retain the protection of the laws of the current state of domicile, need to make sure that he or she will not be treated as a domiciliary by both Florida and the other jurisdiction. A client with significant intangible assets may desire to avoid the impact of the Florida intangible personal property tax.8 In some situations, a client should be advised to avoid or relinquish Florida domicile in order to avoid homestead forced heirship provisions on death.9 Non-U.S. citizens may wish to delay obtaining Florida domicile in order to undertake pre-immigration planning prior to establishment of U.S. domicile or may wish to avoid U.S. domicile altogether to avoid estate taxation of worldwide assets.10
Only careful questioning and coordination with the client's advisors in both Florida and the competing domicile jurisdiction can bring out all of the information required to make an informed domicile decision. For example, the current domicile may have more favorable laws with respect to taxes, divorce, elective share, or other issues that only an attorney in that jurisdiction can fully appreciate. Perhaps the client foresees estate litigation and wishes to retain the protection of a no-contest provision in his or her will, but has not been informed that such provisions are not enforceable in Florida. The client may insist on estate plan provisions (such as naming an ineligible person or trust company as personal representative) that are inconsistent with Florida law. The client may wish to remain politically active in the non-Florida domicile, or may wish to remain closely involved with non-Florida work, church, social, or family activities. Many legal or tax advantages to a non-Florida domicile may be replicated in Florida by careful planning, but without careful review, the client may never become aware of the consequences of a domicile change.
While coordination with non-Florida advisors is essential, it should be noted that an individual's legal, tax, and investment advisors may have different perspectives on the wisdom of a domicile change. Any potential disagreement is exacerbated by the realization that a non-Florida advisor who suggests a domicile change may find himself or herself replaced by a Florida advisor as part of the domicile change process.
Whether an individual decides to change to, or avoid, Florida domicile, either course of action is preferable to leaving domicile ambiguous. Risks of an ambiguous domicile include competing probate proceedings after death11 and state income and estate taxation claims made by the non-Florida jurisdiction.12
Steps to Establish Florida Domicile
Once it is determined that Florida domicile is desirable, a client must take steps to terminate non-Florida domicile and adopt Florida domicile. The first step is to review the law of the former state of domicile. Many states have statutes defining domicile for taxation or other purposes, creating a road map for avoidance of domicile. Even if the state of former domicile lacks a useful statutory definition of domicile, state case law should be reviewed to determine how domicile challenges are handled. While the states share a general understanding of domicile, general principles are no substitute for a review of the law of the involved jurisdiction.
Many states, including Florida, define domicile in a way that is inherently subjective and difficult to prove. Faced with a generally broad definition of domicile, courts and taxing authorities rely on the intent of the individual,13 as proved by contemporaneous expressions of intent and by positive overt acts proving intent.14 Intent, sentiment, and feeling may be shown by testimony of the client and others. However, courts and taxing authorities tend to focus on nonsubjective evidence in order to infer intent. Generally, this analysis focuses on which jurisdiction has the more significant contacts. This gives the planner the opportunity to recommend steps that will lead to the desired result. For example, while a client may change domicile for any reason or no apparent reason, it is helpful to have a record of a clearly enunciated purpose that is consistent with the timing and circumstances of the domicile change.15
While many clients will retain a few contacts in the state of former domicile, as many of the indicia as possible should point to Florida. A list of some of the indicia considered by courts in determining domicile is attached as appendix, and some of the more important indicia are set forth below.
As one court stated, "[a] person's declarations about his home, residence, or domicile are evidence of his intent, including a statement contained in a formal legal document like a will."16 A client wishing to establish domicile should accordingly take aggressive steps to document his or her new domicile contemporaneously with the domicile change. For example, in accordance with F.S. §222.17, a person wishing to establish Florida domicile may file a sworn statement with the clerk of the circuit court. A person may also file a sworn statement regarding intent not to establish Florida domicile. A Florida homestead declaration is also powerful proof of intent to choose Florida domicile. While such statements without more are unlikely to prove domicile, absence of such statements may be taken as evidence that domicile has not changed. Note that when faced with conflicting evidence of domicile, a court or taxing authority may give less weight to self-serving formal expressions of intent than to more concrete indicia of domicile.
The concept of domicile is closely connected with a person's home. Selling or failing to sell the former residence is powerful, but not conclusive, evidence of domicile change. If the