An Overview and Significance
Legally domiciled beneficiary in the context of Asset Protection and Estate Planning refers essentially to a legally defined, specific location that is critical for long-term planning of wealth transfer legislation. The term domicile is used commonly as the main legal concept of jurisdiction when it comes to implementing and adjudicating laws, most notably regarding taxation, citizenship and jurisdiction of the courts.
A legally resident or domiciled person in any country, State or other entity is someone legally entitled to live there permanently, or at least be able to do so indefinitely. Sometimes the two terms are considered interchangeable, however, it is important to make a distinction . Therefore, if an individual possesses legal title to property, they may be entitled to specific rights and obligations under the laws of a State or country.
Additionally, the person concerned must not only have legal domicile (regardless of where they actually live), but share the same domicile as the property or assets they own or inherit. The clear definition of a legally domiciled beneficiary is someone provides a legal and tax residence in a jurisdiction that provides them with asset protection benefits in the event of an insolvency or litigation, or taxation benefits on the eventual transfer of their assets. Having the appropriate residence status is vital for both present and future legal and financial purposes.
Legally Required Characteristics
To determine an individual’s domicile from a legal perspective, presuming the existence of an asset that may be subject to tax in multiple jurisdictions or states, it is necessary to consider all of the relevant laws that might apply. To some extent this will depend on the particular laws of the jurisdiction under which the governing document falls, or under which the asset might be taxed. In New York State, for example, a domiciliary relationship can be created in a number of ways that would legally support the establishment of domicile. Conversely, domicile may not be properly supported even when an individual has satisfied residence requirements in a particular jurisdiction.
First, there are two purely legal means for establishing domicile in New York State. It may be established by either 1) actual, physical presence in the state accompanied by intent, or 2) "presumptive" domicile—domicile that is imputed under the law to be that of the person upon certain presumptions (i.e., that the individual has been absent from and has not been a resident of another state). See N.Y. Tax Law § 605 (b)(3). For example, the New York Personal Income Tax Reform and Fairness Act, which took effect in 2015, changed the definition of resident taxpayer. Now, an individual is considered a New York State resident taxpayer if they, among other things, are a New York citizen or resident, domiciliary or statutory resident for any day of the tax year, or a statutory resident for 183 days or more during the tax year. Id. § 605(b)(1)-(2).
Beyond this, a large number of additional factors are generally considered to determine domicile, some of which are outlined below. In assessing whether a person has changed their domicile, a determination will be made based on whether the necessary elements to establish domicile exist during the time of residency in another state, even if they do not last for the entire year. See N.Y. Comp. Codes R. & Regs. Tit. 20, § 105.3(e)(5). Each of the following factors is also considered:
In designating the state to which domicile should be applied, the courts have held that the domicile may be changed only by "the making of a new home with a declaration to return to it at some future time. The mere abandoning of the old home, without the establishment of a new one, and an intention, once S[he] shall have made that change, to return is not sufficient." Matter of Campbell, 148 App. Div. 568 (N.Y. App. Div. 1911). Generally, the burden of proof is on the party asserting that a person has changed domicile. See Matter of Fred Gennert Testamentary Trust, 265 A.D. at 985 (2d Dep’t 1945). However, the burden may very well be placed on a fiduciary with respect to a testamentary trust or will if their actions demonstrate otherwise. See id.
Further, statutory domicile as established under specific tax laws may exist independent of the common law definition of domicile. Domicile, for tax purposes, depends on the individual facts and circumstances and acts of the person. See Matter of Campbell, 148 App. Div. at 569. These various ways that domicile can be established through legal or statutory means confound the question and present risks in the event of challenging circumstances.
Residence Implications
Tax Implications for Legally Domiciled Beneficiaries
The most important reason to qualify as a legally domiciled beneficiary of the beneficiary’s spouse is that it allows the legally domiciled spouse to treat all real estate owned by the legally domiciled spouse (a requirement of state law) and ву all other assets for which a legal fiduciary for the legally domiciled spouse has responsibility for inventory and appraisal (a requirement of common law in New Jersey) in the estate of the testator or intestate decedent (the deceased) as exempt from Inheritance Tax under NJSTC 54:34-2 for a period of three full calendar years immediately after the passing of the decedent.
In other words, for calendar year 2009, by being the legally domiciled beneficiary at the time of the loved one’s death, real estate owned individually by the decedent, assets for which there is an executor or administrator, and assets in which the spouse was named a beneficiary on who passed prior to their loved one’s death, to name a few examples, would be excludable even if not specifically exempt under 54:34-2. Such would be the case despite the fact that typically a surviving spouse is only entitled to a $3,000 (or in some cases $5,000) exemption and the spousal transferable assets, such as joint accounts, would not otherwise qualify as exempt.
In addition, the legally domiciled beneficiary has immunity from the filing requirements for Inheritance Tax because the legally domiciled beneficiary has no obligation to file Inheritance Tax returns as provided for in 54:34-4.
Taxation of Beneficiaries
For purposes of estate planning, it is important to understand the role that a person’s domicile plays in the distribution of that individual’s assets at death. Excluding retirement accounts, non-probate transfers, bank accounts and annuities, at death, a person’s probate estate typically consists of all assets titled in a decedent’s name, either individually or as a tenant with rights of survivorship; all assets jointly owned with another as tenants by the entirety or as joint tenants; and all assets held in the name of a revocable living trust of which the decedent is the grantor.
Where real estate is held by an individual either individually or as a tenant with rights of survivorship or as tenants by the entirety, the real estate is considered located in the state where physically situated. For example, if real estate is titled in the name of an individual as tenants by the entirety and the property is located in New Jersey, the property is considered located in New Jersey for purposes of probate law. If a person domiciled in New Jersey owns real estate located in Florida, the real estate is considered located in Florida for purposes of Florida law. Generally, if a person is domiciled in a state for more than a year, the law of that state applies to all of the person’s property including real estate owned in another state at the time of death. As non-resident aliens are considered domiciled in their home country for estate tax purposes, they are effectively prohibited from using estate planning techniques in the United States.
"Assets" subject to a person’s estate also include assets passing outside of probate such as jointly owned assets, life insurance proceeds, retirement accounts, and an individual’s interest in certain kinds of pension plans . Generally, for purposes of these assets, the principal issue affecting the application of the law of domicile is the question of who, during lifetime, had the legal power to designate the beneficiaries of the account or asset. The United States Supreme Court, in Safety Fund v. Spector (1941), held that the law of domicile governs the question of who has the legal right to make a beneficiary designation on an account. This is because a beneficiary designation is essentially the making of an involuntary transfer of money and, in that situation, the law of domicile of the grantor should apply. In the case at hand, an unintended beneficiary under New Jersey law took precedence to the benefit of the account over an intended beneficiary designated under the law of New York because the grantor of the account was domiciled in New York at his death.
For a person to take advantage of the generally favorable estate tax laws of a particular jurisdiction, it is essential that the person be domiciled in that jurisdiction at the time of death. A person who is not domiciled in the state where real property is located or where bank accounts are maintained, is not entitled to a credit against state estate death taxes. Generally, the domicile issue is determined using a set of objective tests, including: the state of legal residence; the state of employment; where bank accounts are maintained; where investments are purchased; the place of vote registration; the state to which the person intends to return after leaving; and the location of persons’ closest social and business relationships. The factors which may be considered include the following: the place for issuance of driver’s license; car registration; voter registration; and where employed.
Planning and Domicile
Determining domicile, especially between similar states such as Florida and New York, is one of the greatest challenges in estate/trust litigation because there is no single bright-line test. Even when you believe that you have values of "jurisdictional ties" for a particular forum, courts are not afraid to hold otherwise. For example, dual residents, who have possessions in two different states, may have their choices overturned because of their relatives’ testimony on their intent and what is considered "home" to them.
A "dueling domiciles" situation arises when there is an actual, contested dispute between more than two jurisdictions over a decedent’s domicile at the time of death. Specifically, it is when two testaments create different conflicts of law in terms of the decedent’s domicile. A court may overcome the conflicts therein in favor of one state by reviewing the facts as they existed at the time of the testator’s death.
Whether a decedent was a domiciliary of a state may affect the validity of a will, the admissibility of a will to probate, the jurisdiction of the court, the law applicable to the administration of the estate and taxation of property by a state.
The term "changing residence" has many definitions because, on its surface, it appears simple. Basically, it means that a beneficiary lives in one state and is attempting to prove that he/she is really domiciled elsewhere. It is possible for an individual to have two residences and one domicile. However, in many legislatures, a domicile is created by establishing a physical and actual residence in a jurisdiction with intent to remain there. Other jurisdictions define domicile as the single location where a person has his/her permanent home.
Generally, a person can change his/her domicile. However, numerous statutes and case law specifically provide that a change of residence does not affect a change of domicile, nor does the fact that a person may have multiple residences. A person establishes his/her domicile in the state in which he/she has his permanent home, with the intention of remaining. Factors that may be considered include voting, driver’s license, residency, tax returns and homestead exemption.
Protection and Problem Solving
To ensure that a beneficiary is properly recognized, certain legal documentation should be obtained, and in some cases, a consultation with an attorney may be warranted. An appointed executor has the duty to "collect and account for estate assets" commonly within 60 days of appointment. This requires the fiduciary to transfer or re-title all assets into his or her name individually and as "executor . " In this phase, the executor should review all entities to assure he or she is properly recognized as executor and/or trustee. This includes ensuring that the executor is properly listed with any bank(s), brokerage firms, the IRS, as well as, any other entities holding assets of the estate. If the beneficiary is not titled individually or jointly with the decedent, supporting documentation should be obtained for consideration in appointing that beneficiary as a "Legally Domiciled Beneficiary."