It might sound like a riddle: A man was a Florida resident, had a Florida driver’s license and was registered to vote in Florida. He belonged to multiple country clubs in Florida and died in Florida, where his funeral was held. With that in mind, what state was his domicile – the one he considered to be home? The answer is Connecticut.

That was the recent ruling of a Connecticut court, which deemed the taxpayer in question, Jack Anderson, to be a Connecticut domiciliary.¹ The court based its ruling on the fact that during the final years of his life, Anderson consistently spent more time (around 5½ months a year) in Connecticut than in Florida (3½ months) or his third state of residence, Arizona (three months). He maintained “full personal, social and property connections” to Connecticut, the court ruled. As a result, the executor of Anderson’s estate was ordered to pay over $13 million in estate taxes.

The facts in this case are slightly unusual, as Anderson split his time between three different states without spending the majority of the year in any one of them. But the issues raised by the case resonate broadly. The court’s ruling serves as a useful reminder that taxing authorities and courts will consider several factors in determining where a taxpayer is domiciled, certainly for estate tax purposes and presumably for income tax purposes as well.

This is especially pertinent because in recent years, we’ve seen some people who moved to lower-tax states, or thought they had moved for tax purposes, returning to their former states of residence. They discovered they were unwilling or unable to take all the steps needed to establish themselves as domiciliaries of the new state.

With that in mind, here are three principles to keep in mind when contemplating the tax implications of changing your state of residence:

Establishing domicile

Paperwork only goes so far

Steps such as registering to vote in a new state and getting a new driver’s license might seem sufficient in establishing domicile. That is not necessarily the case. The court acknowledged that Anderson had a Florida driver’s license, was registered to vote there, maintained a local banking account and had declared himself in 2006 – nine years before his death – a Florida domiciliary. But the court did not accord those factors significant weight. It characterized them as “one-time, administrative tasks accomplished with little more than an afternoon’s or a day’s effort, and carry[ing] little practical significance in or impact on Anderson’s day to day life.”²

Courts will scrutinize the facts

If you are moving from one jurisdiction to another and looking to establish your place of domicile, tax authorities will consider where and how you spend your time. For that reason, we urge individuals to actually change the focus of their lives to their new jurisdiction.

In determining that Anderson was a Connecticut domiciliary, the court found that “the most persuasive evidence demonstrating Anderson’s domicile is where he chose to spend his most valuable and limited resource: his time.” But that was not the end of the court’s inquiry. It addressed the relative sizes and values of Anderson’s homes in the three states in question, his patterns for splitting time among his residences, the manner by which he traveled among the residences (private jet), and how and where he received medical treatment. The court noted that it attached little importance to the fact that Anderson, who died in March 2015, was not in Connecticut that year, citing his longstanding habit of not going to Connecticut (where he would spend the late spring, all summer and early fall) until May.

The burden of proof is on the taxpayer

If you are seeking to prove that you domiciled in a lower-tax state, the burden of proof will be on you (or your heirs or executor). In the Anderson case, the Connecticut Commissioner of Revenue Services determined that the estate owed $13 million in taxes “because the executor failed to prove that Anderson was not a Connecticut domiciliary.”³ In upholding the Commissioner’s determination, the court concluded that the executor had failed to meet the burden of demonstrating by “clear and convincing evidence”⁴ that the Commissioner’s assessment was erroneous or unreasonable.

For anyone who has moved from one jurisdiction to another, or is contemplating such a move, the Anderson case reinforces some key steps to take when establishing domicile in a new state:

Keep good records. Taxing authorities and the court need to find all the relevant facts to come to a determination.

Change the focus of your life to the new jurisdiction. What may have been most damaging to Anderson’s domiciliary claim is that by all accounts he maintained equally robust social, personal and property connections in Connecticut as in Florida.

Prepare for income as well as estate tax audits. We note an unusual aspect of the Anderson case: It makes no mention of whether Anderson was considered a part-year resident of Connecticut (or Arizona) for income tax purposes. (Of course, there is neither an income or estate tax in Florida.) While the financial outcomes may differ, both income audits and estate audits draw on similar criteria and analysis to determine what constitutes a domicile – where a taxpayer subjectively considers home:

• A taxpayer may have many residences, but only one domicile at a time.
• To change domicile, one must “leave and land” – not only leave one jurisdiction, but land in another.
• “Domicile” is a subjective test based on where the taxpayer considers to be home, but is determined largely by reference to objective criteria.
• The burden is on the taxpayer to demonstrate, by clear and convincing evidence, that he or she has changed domicile.

We can help

For more information on how to redomicile in a way that works for you and supports your goals, contact your J.P. Morgan advisor.