Plan for the Winnebago set

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.