Home Is Where You Hang Your Hat: The Significance Of Domicile Planning

A debtor, regardless of state residence, can seek protection from his or her creditors in the federal bankruptcy courts. However, the state in which the debtor resides or, more accurately, is "domiciled," will determine which assets the debtor may keep and which must be turned over as part of his or her bankruptcy estate.

Similarly, from an income tax perspective, many states, such as New York and Pennsylvania, impose a personal income tax on the taxable income of every person. In the case of a domiciliary, the tax is based upon the federal adjusted gross income, which means all income wherever and however earned. In the case of a nonresident, taxable income is based only on income derived from or connected with sources in that state (i.e., rents received from realty, compensation from a business, trade, or profession or occupation carried on in that state). However, even a nondomiciliary will be considered a resident of that state for state income tax purposes if he (i) maintains a permanent place of abode in that state; and (ii) spends 183 days of the taxable year in that state—the so-called "snowbird tax."

Lastly, although the exemption from the federal estate and gift taxes has now been "permanently" established at $5,250,000, many states that impose a state estate or inheritance tax have not correspondingly increased the exemption for its local transfer tax purposes.

Considering that the state of Florida has no state estate or inheritance tax, nor a personal income tax, the fact that Governor Cuomo and the New York State Legislature are finalizing arrangements to extend a high tax bracket for the state's top incomes may give New Yorkers pause to consider their annual net tax bill, not to mention the cost of passing their estates on to the next generation.

Similarly, from a financial planning perspective, Florida exempts the following assets from the claims of creditors and, therefore, has protected from inclusion in a federal bankruptcy estate: an unlimited "homestead" exemption for the principal residence; assets held by a husband and wife as tenants by the entireties; qualified deferred compensation plans, including IRAs and 529 college plans; life insurance policies; life insurance proceeds; annuities; and wage accounts. With respect to business property, Florida law specifically limits the rights of a creditor to a partner's interest in a partnership or a member's interest in a multimember limited liability company to a "charging...