Basics of Estate Planning: Domicile and Residency

This is another in a series of blogs on the basics of estate planning. This week, we’ll look at domicile and residency.

Residency is where a person ordinarily lives. Domicile is where a person has their permanent home and substantial connection. So, residency and domicile are not the same thing and someone may be a resident of one location and yet be domiciled in another.

Domicile at common law is residency, combined with no current intent to move elsewhere. Once a domicile is established, it remains until another domicile is established. For example, if one grows up in New York and moves for work to Texas on assignment, he may be a resident of Texas, but still a domiciliary of New York.

Thus, your domicile at birth remains until you establish one elsewhere.

From a federal tax perspective, a citizen of the United States is taxed by the U.S. on their worldwide income and assets, whether or not they are resident here. But, the same is not true for non-citizens (assuming they don’t have a green card).

For U.S. income taxation, a person is considered a resident based on counting the days of physical presence. It requires 31 days of presence in the current year plus 183 days of presence during the 3-year period including the current year. For this calculation, you would add all days in the current year, 1/3 of the days of presence in the prior year, and 1/6 of the days of presence in the year before last. If the total equals or exceeds 183, then the person is a resident for the current year. Here’s an example: Miguel, a citizen of Mexico, was physically present in the U.S. in 2014 every day (except for a 5-day vacation). In 2015, Miguel moved at the end of September. Miguel spent a 3-day weekend in the U.S. once each month since moving. Miguel’s total would be 190 days of presence: 36 days for 2016, 94 (282/3) for 2015, 60 (360/6) for 2014. Thus, Miguel would be considered a resident for income tax purposes for 2016 even though he only spent one weekend per month.

For federal estate taxation, the analysis is completely different. A person is considered a resident, not based on physical presence, but based on domicile. Thus, it would be possible for a person to not be physically present in the U.S. for quite some time and yet still be a domiciliary. The factors they would consider include where they had property, their business contacts, where they had health care providers, pets’ health care providers, etc. Thus, it’s possible that Miguel never established domicile in the U.S., especially if his work in the U.S. was for a set period of time.

Thus, it is important to note how a jurisdiction taxes and exactly what criteria they will use to determine whether someone is subject to tax. For example, here is the State of New York’s guidelines for income taxation, including residency/domicile.

In upcoming blogs, I’ll discuss more on the basics of estate planning.

Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128
www.aaepa.com