Looking to Claim Florida Residency? Not So Fast.

Yes, it’s August. But soon enough your thoughts may turn to packing up the car and heading south to enjoy a warmer winter. If you are heading to Florida, don’t just assume that you can escape Massachusetts taxes just because you put a Florida plate on your car.

One estate and financial planning issue that comes up for “snowbirds” who split their time between Massachusetts and Florida is just which state is the snowbird’s legal “home,” or “domicile.”  The Department of Revenue’s (DOR) general rule is that the snowbird must live in Florida for at least 183 days a year and have largely severed social, business and other ties to Massachusetts to be considered a Florida domiciliary. If you try to claim that you are a Florida resident and file a non-resident income tax return,  The burden will be on the snowbird to prove to DOR that you are no longer domiciled in the Commonwealth for the purpose of taxation of Massachusetts-sourced income.

To establish nonresidency, the snowbird needs to show such things as: the degree to which has the snowbird severed social and familial ties with the Commonwealth, the relocation of any business activity, changes in the registration of the car and voter registration, whether the snowbird is permanently employed in Florida, whether Massachusetts bank accounts have closed, and the degree of involvement in the new Florida community.  If the snowbird cannot establish the facts of nonresidency to the satisfaction of DOR, then all “Massachusetts-source income” (including ordinary income and capital gains) will continue to be subject to income and estate taxation and the snowbird will continue to be required to file the Massachusetts resident income tax return. Failure to file the correct tax return may subject the snowbird to fees and penalties.

Similarly, the estates of Massachusetts residents are subject to graduated estate taxation if they exceed $1 million. If the personal representative of a deceased snowbird with a sizable estate incorrectly tries to claim that the decedent was a Florida resident at the time of death in the hope of avoiding estate and fiduciary income taxes, the estate could face significant additional costs, and the heirs of the estate might try to hold the personal representative personally liable for the reduced size of the inheritance.

Thus, it’s a good idea for seniors who think they might want to call themselves Florida residents to avoid paying taxes to speak first with a Massachusetts CPA or tax attorney to see if they have a valid argument that they are no longer domiciled in Massachusetts. The money spent on such a consultation will be far less than the potential cost of a DOR audit.

Don’t be too quick to shred!

There’s been a good discussion on the National Academy of Elder Law Attorneys list serve in response to a USA Today article on shredding documents. The thesis of this article, like so many others, is that shredding “unnecessary” documents after tax season is critical to prevent identity theft. So, the article suggests destroying canceled checks once the bank statements have been reconciled, holding on to records for investment transactions to show the purchase or sale price for no more than three years after the transaction, etc.

There’s just one problem with this thesis: taxes aren’t the only reason why one should hold onto records. Before you purge, think ahead.

MassHealth applications for long-term care services require the applicant to produce five years of records., including tax returns, invoices for purchases in excess of $500, bank statements, canceled checks, credit card statements, etc., etc. If this information is not supplied with the application, the application will be rejected. I’ve lost track of the number of times I’ve asked clients to produce documents needed for a MassHealth application only to be told that they’ve been lost or destroyed. Then there’s the problem of getting duplicates of canceled checks or old bank statements. We’ve had one small bank tell us that they didn’t issue copies of statements if the statement was at least three years old. If there is a question about whether a transaction may have been a gift, we need to supply documentation showing what was purchased so that we can argue that there was no gift made or intended. For these reasons, I recommend that seniors hold on to five full years of financial records, preferably set up in chronological order.

There are other older documents that need to be retained as well. Veterans and their surviving spouses need discharge papers to apply for Veterans Administration benefits, such as Aid and Attendance. Invoices and canceled checks for improvements to one’s home are needed at the time of sale, so that capital gains tax liabilities can be properly calculated.

Federal Estate Tax — likely here to stay

In 2001, Congress passed legislation which was intended to phase out the federal estate tax — sort of. Over the past six years, the threshold for federal estate taxation increased to its current level of $2 Million this year and $3.5 million in 2009 — and then disappear altogether for 2010 and come back at $1 million on January 31, 2011. Despite morbid jokes about timing one’s death for December 31, 2010, this scheme has caused headaches for estate planning attorneys all over the US. It’s hard to know how to advise a client about federal tax planning when Congress fails to address the sunsetting of a short-term political gimmick.

It seems increasingly likely that sometime next year, Congress will pass new estate tax legislation which will preserve estate taxation at a higher threshold. The only question is what that threshold will be and the tax rates. Barack Obama has stated publically that he is in favor of a $3.5 million threshold; John McCain has been quoted in favor of a $5 million threshold. Since good estate planning with tax-favored trusts allows a couple to pass on an amount equal to double the threshold amount free of federal estate taxes, as a practical matter, it will remain possible for a married couple to pass on at least $7 million free of federal estate tax to your children. Therefore, the VAST majority of estates will continue to never see federal estate taxation. For more — see Kiplinger Retirement Report, June 25, 2008 http://tinyurl.com/3nlmf8

However, many Massachusetts residents must still plan for estate tax minimization. The Massachusetts estate tax threshold is only $1 million, and there are no plans to change it. That tax is applied to the entire estate –including real estate, life insurance, and retirement accounts. A will, by itself, will not prevent Massachusetts estate taxation on a $1 million estate at the death of the second spouse. The tax rate shoots up sharply. A taxable estate of $1,050,000 would owe $36,000 in taxes. A taxable estate of $1,500,000 would owe $64,400.

By creating a Massachusetts credit shelter trust, you can double the amount left to your heirs tax-free. If your create an irrevocable life insurance trust and provide the trust with funds to cover any additional tax liabilities, you can minimize the risk of or even avoid paying any tax liabilities with your estate’s assets while passing on even more money to your children tax-free from the life insurance policy.

Please feel free to call my office at 781-433-8665 if you would like to discuss saving some serious money.