Unfortunately, the old adage that death and taxes are unavoidable is true. Unfortunately, they are also both closely related. For individuals with estates that are subject to a federal and/or a state-level estate tax, there exists the possibility of being double taxed if you maintain a residence in more than one state. Unfortunately, this is all-too-common of an occurrence. A comprehensive approach to estate planning can help avoid this unpleasant surprise.
How It Happens
Double taxation typically occurs in situations where individuals have multiple properties spread across different states. It is not uncommon for an individual to have a home in New York and another home in, say, Florida. Potentially, the second home could be even closer – like Pennsylvania. Wherever your multiple residences are, you need to be aware of the potential tax consequences of maintaining property in various states.
If you spend half of your time in your New York residence and half of your time at your Pennsylvania home, you may be considered by each of those states to be a resident in that particular state. It is extremely important that you work with an experienced estate planning attorney in each state that you have a residence or other significant financial interest to make sure you understand how inheritance works and what the tax liability for those interests might be both for your estate and your beneficiaries.
One way to potentially avoid double taxation is to clearly establish your domicile. Domicile is a legal term that refers to which state you are an actual resident of. It plays an important role in everything from federal lawsuits to eligibility for benefits, and may even impact the types of trusts that can be established to protect your assets in a given state.
Establishing domicile may seem relatively straightforward. You may consider one place your primary residence. However, that does not mean the law does. You can take certain steps to make your intentions regarding your domicile clear. These can include:
- Registering to vote in the state you wish to be domiciled in (and actually voting to demonstrate your intention to do so);
- Obtaining a driver’s license in the state that you consider to be your domicile;
- Registering property – including vehicles, boats, and other assets – in the state you wish to be considered your domicile;
- Filing income tax returns in the preferred state;
- Maintaining financial accounts in the state where you prefer to be domiciled, even though it may be tempting to hold accounts in another location; and
- Creating and filing important paperwork with your permanent address listed as the one you maintain in the state in wish you want to be considered as domiciled, among others.
The most important part of domicile is demonstrating your preference, and these are common steps that can help demonstrate to a court in another state where you happen to hold property that you never intended to be domiciled there.
An experienced estate planning attorney can help you understand concerns about domicile and work with you on coordinating different aspects of your estate plan involving other states, even working with estate planning attorneys in another state to ensure that your estate plan is as solid as possible and leaves no lingering questions about your domicile. Taxes can have an unfortunate and significant impact on the assets and value of your estate, and that is especially true if you are potentially facing taxation in more than one state.