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Regulation and Compliance > State Regulation

Plan for the Winnebago set

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Many Americans, especially retirees, are choosing to spend their time in more than one state. Traditionally called snowbirds, these clients present advisors with a unique set of considerations not typically present with clients who are permanently rooted in one state. While most clients who choose to be snowbirds do so for personal or health reasons, there are several financial and estate planning issues that deserve advisors’ attention. Awareness of these issues will allow advisors to plan strategically and develop tax-efficient financial solutions for snowbird clients.

While there are several concerns facing advisors of snowbirds, the primary consideration should be to establish the client’s primary place of residence, or “domicile.” Since snowbirds are mobile and often decide to change their permanent residence, it is an issue that should be considered carefully. The client’s domicile has important tax and estate planning implications. It will also determine where the individual’s will is probated and which state’s laws govern the disposition of the individual’s assets upon death. Even though many retirees reside in two different states, they still have only one permanent place of residence.

Unlike clients who reside in only one state, ascertaining a snowbird’s domicile can be complicated. Each state has specific rules it uses to define resident status, and the client’s intention to claim one state as his permanent residence, while it is given some weight, is not always the overriding factor in determining domicile. A client, therefore, should not assume domicile has been successfully secured in a particular state. Advisors also must be aware that, generally, once domicile has been established, it continues in that location until properly re-established in a new jurisdiction.

Although official residency status varies by state, several common requirements are used to determine if a person has successfully achieved permanent residency. The starting point is to determine the amount of days a snowbird client spends in a particular jurisdiction. Generally, if a person has spent more than 183 days of one year residing in a particular state, then a presumption arises that the person is permanently residing in that state. However, it is important to note that merely spending more than 183 days within a state is not conclusive proof of domicile.

Further steps are usually required for an individual to prove domicile has been established in a certain jurisdiction. At the very least, the client should change his driver’s license and register his automobile in the state he wishes to claim as his domicile. Registering to vote in the new locale and actually voting will demonstrate the individual’s intent to permanently reside in that state. The client should also draft a proper will in the new domicile, and the client should pay taxes as a resident in that state. Some tax professionals also recommend that clients save receipts for purchases made in the new state – purchases for everyday items such as fuel and meals will assist the client in proving a permanent change of residence has been made.

Tax issues
Determining an individual’s domicile is important for several reasons, one of which is the client’s state income tax liability. Even though some states popular with snowbirds do not have a state income tax, this is still an issue that must be addressed with many snowbird clients. Splitting time between different states could increase the individual’s tax liability because multiple jurisdictions may attempt to claim an individual as a resident for tax purposes. It is important to note that a person may still be subject to a state’s income tax as a nonresident, so establishing domicile in one state may not completely absolve him from paying income tax in another jurisdiction.

At the very least, the advisor’s goal should be to minimize or eliminate a client’s income tax liability in the nondomicile state, and there are recommendations an advisor can make to this end. Snowbirds should not open interest-bearing accounts or brokerage accounts in the nondomicile state. Furthermore, snowbirds should refrain from earning income in the second state, and should also avoid having paychecks forwarded to an address in the non-domicile state. Fortunately, computers and Web-based technology have made this process considerably easier for snowbird clients.

“Technology has changed everything,” notes Glenn Hermanson, a CFP and asset management specialist based in Denver. “Clients can access their bank and brokerage accounts online, transfer money electronically and have paychecks deposited directly into an account maintained in the domicile state. Utilizing the available technology makes it much easier for snowbirds to avoid jeopardizing their permanent resident status.”

Property taxes also should be considered when advising snowbird clients. Since many snowbirds often maintain a permanent residence in their domicile state and a vacation home in another state, owning property outside of the domicile state could lead to a heavy property tax burden. Again, the client’s domicile will be an important consideration and could impact how much property tax the client pays. Property taxes are a fact of life for homeowners, but planning options may exist to reduce this burden.

For example, in the snowbird haven of Florida, state law mandates that annual property tax increases are capped at 3 percent for Florida residents. On the other hand, annual growth of property taxes for nonresidents remains unrestricted. This means nonresident property owners bear a heavier property tax burden than do residents. For the snowbird homeowner, Florida state law provides an incentive for those who own vacation homes in Florida to consider making it their domicile. While most snowbird clients would not contemplate this type of law when making living arrangements, advisors should take into account state law. Under the right circumstances, an advisor might be able to create a tax-efficient strategy for a client in this situation.

Estate planning issues
Resolving estate planning concerns may also be more complicated with snowbirds. Generally, a decedent’s will is offered for probate in the state where the individual was domiciled at death. A decedent’s estate can, however, be subjected to multiple probate proceedings if the individual owned property outside of his domicile state at the time of death. As mentioned earlier, snowbirds often own property in more than one state, and this could leave the individual’s estate vulnerable to significant state estate taxes. Also, the more varied and substantial the individual’s asset holdings, the more complicated the probate proceedings may become. There are, however, legal options available to out-of-state property owners who prefer to avoid this costly situation.

According to John T. Kearns, a CPA and estate planning attorney in Greenwood Village, Colo., a popular and often effective option for avoiding probate in multiple jurisdictions is to establish a revocable living trust. In this situation, title to the property located outside of the domiciliary is transferred from the individual to the trust. When this is done, the individual no longer technically owns the property, and, therefore, the asset now titled in the name of the trust is not subject to probate in the state where it is located. Furthermore, the retained right of revocability gives the client the ability to remove the property from the trust if future circumstances make this change necessary.

Another planning vehicle available to a client in this situation is the limited liability corporation. By establishing an LLC and titling the property in its name, the legal entity becomes the owner of the real property. According to Kearns, this allows nonresident property owners to avoid probate in the nondomicile state because the real property interest is converted to an intangible personal property interest. This makes the owner’s interest in the real property similar to a partnership interest.

For probate purposes, intangible personal property is treated as located in the state where the owner of the property is domiciled and not in the state where the property is located. For income tax purposes, however, such an LLC would often be disregarded as a separate entity, and thus the client’s circumstances must be carefully examined before utilizing this method.

An individual’s estate planning documents must conform to the laws of the state in which he permanently resides. If a snowbird client changes his domicile, he should have his estate plan professionally reviewed and revised, if necessary, to comply with state law. This is essential to avoid costly problems and possible litigation. Updating these documents in the new jurisdiction will lessen the burden on the client’s surviving family members.

More to consider
Other planning issues, such as health care coverage and long term care insurance, may also differ for the snowbird client. Brandon Sears, a CFP and owner of Sears and Associates in Phoenix, Ariz., recommends his snowbird clients consider where they will eventually settle and the cost of LTCI in different regions of the country. Sears also counsels his clients to decide what type of long term care facility they desire and to compare the costs of these services in various areas. Splitting time between states may also cause an interruption in an individual’s health care coverage. Clients should be advised to verify that their health insurance is valid in the different areas where they spend their time, and ensure that no gaps in their coverage exist.

Even though most snowbirds do not consider these issues when deciding where to reside, they are clearly important to their financial health. The state in which the client is domiciled has many tax and estate planning implications, but with proper foresight, these issues can be successfully resolved. The snowbird client who also owns property outside of his domiciliary presents additional planning challenges, but solutions are available to ease any problems created by this situation. Other issues, such as health insurance and LTCI, can be resolved easily by the client once he is made aware of them.

The planning considerations brought about by snowbird living are complex and unique to each individual’s situation, and, therefore, clients and their advisors should seek the advice of tax and legal professionals.


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