A Move Can Save Millions
For ultrawealthy clients, it may matter a lot where their boat is docked.
For ultrawealthy clients, it may matter a lot in which state their boat is docked.
HIGH-NET-WORTH CLIENTS CAN SAVE MILLIONS OF dollars by changing their domiciles, but they can’t complete the shift successfully without careful planning, according to one expert.
Advisors helping their clients to move to states with no state income tax or estate taxes should recommend they keep meticulous records at all times, Bachir Karam, a special counsel in Sullivan & Cromwell’s Estates and Personal Group, said at the Sourcemedia Disrupt|advice conference in New York in September.
The size of clients’ new homes; the location of their boat, art and heirlooms; and the precise breakdown of how many days they spend in their new and former states may all figure in litigation around domiciles, Karam notes. Advisors should even discuss what flights clients take in and out of the old state, he says.
The absence of estate and income taxes in Florida, Nevada, South Dakota, Texas and Alaska is a key motivation for people moving to those states, and such moves are made easier because of technologies that enable virtual meetings and telework, Karam says.
Meanwhile, the high state rates in New York, California and Connecticut are driving residents away, he says. “Each year, it feels like they’re up another percentage point or a fraction of a percentage point,” Karam says. “And every point is costing our clients — in some cases, millions of dollars.”
“And so when we remind them that, if they were a resident of a different state through certain careful planning steps, they could save that amount,” Karam says, “it’s really starting to push the envelope to get them to think about doing this planning.”
ESCAPE FROM NEW YORK
New Jersey’s move to end its estate tax on Jan. 1 will make it somewhat more attractive to HNW clients. But both New York and New Jersey often lose residents to Florida or New Hampshire, he says.
Clients’ success in switching their residency comes down to whether they spent more or less than 183 days in a state and to other aspects of their domicile — that is, their permanent fixed home for legal purposes. Days spent and the location of prized possessions, known as “personal items which enhance the quality of life,” loom large, Karam says.
In one case he cites, a client beat a New York tax audit with a boat as a key determining factor. The client moved the boat from a lake in New York to a dock off Florida, outfitting the vessel for deep-sea saltwater fishing.
Clients establishing a new domicile should also relocate works of art and get new driver’s licenses and voter registrations, he says.
Another client overcame an audit because he sold his New York home, purchased one three times as large in Florida and rented a small New York City apartment to visit children, according to Karam. A client who wasn’t as lucky had kept her New York home and outfitted her home in Florida exactly the same.
Clients should consider documenting their location through encrypted GPS records using an app called Monaeo, Karam says.
When visiting their former state, he says, they should book flights that arrive in the morning and
depart at night, in order to avoid spending an extra day on an early-morning flight.
Regardless of the steps that are taken, clients could face annual legal fights with their former states, Karam says. The proceedings could include audits that take months or even years to resolve. Two states may even claim a client as a resident at once, he adds.
“You can only have one domicile, but when you have clients spending six months in one place and six months in another, it’s starts to be a very murky analysis,” Karam says. “And you can bet that the former state will do its best to try to claw back the revenue.”