Where to live has traditionally been a decision based on personal factors such as quality of life and proximity to family and friends. However, as state and local income and death tax rates rise, high income and high net worth individuals are increasingly asking “how do I change my tax home?” and states are questioning whether a taxpayer really did make a change.
What are the factors to be considered in determining a taxpayer’s domicile for tax purposes?
The word “domicile” is derived from the Latin “domus” meaning a home or dwelling place. “Domicile” was defined by Roman Law to mean “in whatsoever place an individual has set up his household goods and made the chief seat of his affairs and interests, from which, without some special avocation, he has no intention of departing; from which when he has departed, he is considered to be away from home, and to which when he has returned, he is considered to have returned home.” Its meaning has evolved over time to be the place where a taxpayer has his true, fixed, and permanent home.
Intent is Decisive Factor
Intention is a decisive factor in the determination of whether any particular residence which a person may occupy is his domicile. A place continues as a person’s domicile until superseded by another. A change of residence without the intention of creating a new domicile leaves the last established domicile unaffected.
In order to change domicile, both the intent to abandon the former domicile and to take up actual residence at the new location must be present. The test of intent with respect to a purported new domicile has been stated as “whether the place of habitation is the permanent home of a person, with the range of sentiment, feeling and permanent association with it.”
The conclusion as to whether one domicile has been replaced by another depends on an appraisal of the circumstances and conditions surrounding the person whose domicile is in question. The determination in each case will be decided upon the particular circumstances of the case.
Tax Motivated Intent Okay
Provided that there is an absolute and fixed intention to abandon one domicile and acquire another, the person’s motivation for such change is of little importance. The fact that a person is motivated by self-interest does not prevent a change of domicile. Further, a change of domicile can motivated primarily by a desire to gain a tax advantage. In fact, tax saving is an increasingly common reason for changing domicile. Tax motivation will not impede a change of domicile if the intention of the individual to acquire a new domicile is absolute and fixed and if his acts confirm that intention.
Burden of Proof
There are two central elements to a change of domicile: physical presence at the new location, and intent to make such new location a domicile. The burden of proof as to a change of domicile is on the person asserting the change, usually the taxpayer. Generally, this burden must be met by clear and convincing evidence.
Primary Factors for Consideration
Factors to be used in determining domicile are generally divided into two categories, primary factors and other factors. Traditionally, there have been five primary factors considered. In most cases, consideration of these five primary factors is sufficient to allow for a determination of a person’s domicile. Typically, in a domicile analysis, other, subsidiary factors with relationship to domicile will not be considered where the primary factors can be used to establish a basis toward a definite location as a person’s domicile.
A change in domicile is typically signaled by a major change in the pattern surrounding the five primary factors. It is not necessary to sever all connections with a former domicile, however.
An analysis of a person’s overall living pattern will be considered. Has there been a change in the person’s living pattern after the purported change of domicile? Has there been a triggering event for a lifestyle related domicile change such as retirement, loss of employment, death of his spouse, divorce and remarriage? Has there been a recent emancipation of minor children?
For example, a change of use of a former domiciliary residence can be particularly important in confirming a person’s stated intent to change domicile. a modest change in lifestyle would not generally constitute strong evidence of a change of domicile. For example, a significant change in lifestyle may not be reflected by a change from spending six months per year in one location to spending seven months per year in the new location.
None of the following five primary factors alone will support a finding of a person’s domicile. A weighing process of analyzing the aspects of each of the factors must be applied in order to arrive at a proper conclusion.
Factor 1: Home
Questions of domicile rarely arise where an individual maintains a single residence. The more difficult circumstances arise where an individual owns more than one residence. Among the residences available to an individual, which does the individual consider to be “home?” For this purpose, home may be viewed as a building or more broadly as the community in which a person lives.
Each residence must be compared with the other residences maintained by a person to determine the circumstances that support a determination of domicile at a particular residence. The individual must use the residence as his home and this use pattern must outweigh the patterns of use established at the other locations.
An element of this factor is the relative size of the several residences. Similarly, the value of the various residences owned or leased by a person may be informative to the evaluation of the “home” factor.
Finally, how a taxpayer uses each of the residences may enlighten this analysis. An analysis of use may include a review of domestic and other employees associated with the use of the property. A larger domestic staff at one location as compared to the others may be an indicator of which residence most fully satisfies the “home” factor.
A person’s financial condition may allow them to retain multiple residences notwithstanding their intent to change domicile. In this case, the retention of a former domiciliary residence may be an insignificant indicator of a person’s current domicile. If all aspects of the “home” factors are equal in weight, the residence that the taxpayer has historically maintained as their home may be of greater importance.
Factor 2: Active Business Involvement
A person’s continued employment or active participation in business activities is a primary factor in determining domicile. If a person continues active involvement in activities located in his historical domicile, such actions must be weighed against the individual’s involvement in businesses at other locations.
Unlike a person’s active participation in a business enterprise, the ownership of passive investments in a location should not be an indicator of domicile.
Advances in communications have complicated the analysis of this factor. It is possible to participate more regularly in the day-to-day operation of the business from remote locations. Remote participation in a business is not in and of itself sufficient to support a determination of a retained domicile.
Factor 3: Time
Another primary factor is a quantitative analysis of where the individual spends his time. It is necessary to compare the time spent in one jurisdiction in relation to time spent at other locations. As with each of the primary factors, “Time” is just one of the factors and in and of itself is not determinative.
In evaluating this factor, consideration must be given to the overall living pattern of the person. For example, seasonal visits/returns to a former domicile should not be a negative indicator of intent to change domicile. It is necessary to demonstrate a shift in focus from the former domicile to the new domicile. A person who merely changes from spending six months per year in one location to spending seven months per year in that location demonstrates a minimal alteration of overall living pattern and such a change should not constitute strong evidence of a change of domicile.
Analysis of time spent in locations can be supported by diaries, appointment logs or similar documentary evidence of location. Interestingly, the hyperaccurate maintenance of logs has been sometimes viewed as a counterindication of a domicile change: this is not normal personal conduct. However, given the amount of tax exposure a domicile determination may involve, careful recordkeeping should more properly be viewed as prudent.
In the absence of normal documentary evidence, other information such as credit card receipts, utility usage patterns, ATM access records, and other information indicating the location of a person may be looked at to establish information necessary to complete the “time” analysis. Obviously, this level of analysis of can be personally intrusive.
Factor 4: “Near and Dear” Items
Another primary factor is the location of items which an individual holds “near and dear” or which have significant sentimental value. This is sometimes referred to as the “teddy bear rule.” Where do you keep your teddy bear?
“Near and dear” items include family heirlooms, works of art, pets collections, and other personal items that are associated with a person’s life and lifestyle. Note that these items do not necessarily have significant financial value. Family documents and photo albums can be important “near and dear” items to consider in this analysis.
If a person is a collector, it is likely that in establishing a new domicile, accommodation will be made for the moving of his collection to the location of his new domicile. Similarly, a change of domicile will frequently involve moving the important personal items, particularly those of sentimental value. Items having both sentimental and significant financial value, such as jewelry or valuable collections, may be indicated on insurance policy riders associated with a particular location.
Factor 5: Family Connections
The fifth factor for consideration in any evaluation of a person’s domicile is a review of the person’s family ties to a particular location. An investigation of the facts relating to this factor can be intrusive into the person’s private and personal lifestyle. Accordingly, this factor is ordinarily examined only if a review of the initial four primary factors is inconclusive as to domicile.
Typically, an analysis of family connections is limited to the taxpayer’s immediate family. Generally, this will include only the individual, his spouse and any minor children. The focus of this analysis will be on the living patterns established by the taxpayer. A family connection can help determine the domicile of an individual when it is the bond that draws an individual back to a location whenever absent and encompasses a habit of life.
Evaluation of Primary Factors
No single primary factor is determinative of a person’s domicile. Any analysis must be based upon review of all of the first four primary factors affecting domicile. If it is not possible to reach a conclusion regarding domicile from an analysis of the first four primary factors, then the fifth factor, family connections, is generally added to the review.
“Other” Factors Affecting Domicile
Apart from the primary factors, there are other factors which can provide some insight into a domicile determination. These factors are subordinate to the primary factors. They are generally considered only if a review of the five primary factors is inconclusive with regard to a change of domicile. It should be noted that these “other” factors, by themselves, should not form the basis for a domicile determination.
One of the reasons these “other” factors are viewed to be subordinate to the primary factors discussed above is that they are more subject to manipulation by an individual. Accordingly, they will routinely be given less weight. In this regard however, is more helpful than not to review these “other” factors and conform them to a person’s intended domicile.
Among the “other” factors that may advise a determination of domicile are: delivery address used for family business correspondence (bank/broker statements; bills, etc.); location of safe deposit boxes; location of motor vehicle registrations and operator’s licenses; voter registration; domicile declarations in legal documents (contracts, wills, trusts, etc.). As a matter of policy, charitable contributions and religious organization membership are typically viewed as “non-factors.”
High income and high net worth individuals should actively review the tax consequences of their choice of domicile. For some, significant tax savings can result from a change of domicile. However, a change of domicile requires real change of a person’s intentions and lifestyle. Without demonstrable change, it will be difficult to prove a true change of intent to abandon the former domicile and to take up actual residence at the new location. By reviewing the five primary factors for determining domicile and identifying the major changes in the patterns surrounding those factors, it will be possible to support a finding of a person’s change of domicile.