The concept of “domicile” is critical in determining U.S. estate tax liability upon a decedent’s death since property located outside of the U.S. and owned by a non-resident, non-US citizen is not subject to U.S. gift and estate taxes.
How to Determine a Decedent’s Domicile
A decedent can be “domiciled” in the U.S. for estate and gift tax purposes if they lived in the U.S. and had no present intention of leaving. However, a decedent may have been a tax resident of a jurisdiction without being domiciled there – they may have lived and worked in Jurisdiction B for a period of time, intending to eventually return to their “home country,” Jurisdiction A. The U.S. Treasury Regulation 20.0-1(b)(1) addresses this, stating:
“A person acquires a domicile in a place by living there, for even a brief period of time, with no definite present intention of later removing therefrom. Residence without the requisite intention to remain indefinitely will not suffice to constitute domicile, nor will intention to change domicile effect such a change unless accompanied by actual removal….”
Evidence Used to Determine Domicile
The following factors have been identified in U.S. case law as being relevant to determining domicile and require careful consideration when selecting a decedent’s domicile:
- place of birth and citizenship
- green card status
- intention to live permanently in the U.S.
- time spent in the U.S.
- family ties
- i.e., surviving spouse and/or children
- statements in legal documents (such as wills and trusts and power of attorney)
- location of residential property or any real estate
- location of assets a creditor may have access to
- ties to other countries
- location of business interests
- the address listed on the decedent’s tax return
- whether their tax returns were filed as a resident or non-resident
location of clubs, church affiliations, bank accounts, and pets
- the address used for voter registration, car registration, driver licenses, newspaper subscriptions
How to Create an Affidavit of Domicile
While it may be unpleasant to consider such topics while one is alive, when conducting the estate planning process, it may be helpful to create an affidavit of domicile sooner rather than waiting until the decedent’s time of death to avoid dying intestate. The affidavit of domicile is a brief legal document that establishes one’s domicile and helps the probate court distribute your property to your heirs or beneficiaries. In a typical affidavit of domicile, there will be detail such as:
- The decedent’s information and their personal representative,
- The affiant’s information,
- Real property,
- Details on stocks and bonds, bank accounts, and other holdings, and
- Instructions on how to execute the affidavit of domicile.
Where Are You Domiciled and How Does This Affect Your Estate?
For estate tax purposes, whether the deceased person or decedent was a “resident” of the U.S. will be determined based on their domicile rather than by reference to the definition of “resident” (in Internal Revenue Code section 7701(b)) that is used for income tax purposes. Also, for the purposes of discussing domicile, it is important to distinguish between inheritance tax and estate tax, as the two are often used interchangeably but are different since estate taxes are paid by the estate of the decent, whereas inheritance taxes are often paid by beneficiaries.
In any case, for estate tax purposes, the U.S. Treasury Regulation section 20.0-1(b)(1) defines “domicile” as “living within a country with no definite present intent of leaving. Determining domicile for estate and gift tax purposes is fact specific. Once a non-citizen establishes the United States as their domicile, they remain a United States domiciliary until a new domicile is established. If there is doubt as to the location of domicile, there is a rebuttable presumption that the decedent was domiciled within the country where [they] resided.”
Where Not to Domicile
Ultimately, your state of domicile is a decision unique to you. It is easy just to tell someone not to be domiciled in a certain country, such as the United States, Japan, or Germany, but everyone’s situation is different, and they may have assets dispersed in different countries, a spouse who is a non-U.S. resident, and other situations which require the broad-based expertise and planning of a firm well-versed in these matters.
What Is the Relevance of Domicile in Estate Administration?
Once the IRS has established a decedent’s domicile (and, in turn, their residency), the IRS can then determine the decedent’s estate tax liability by reference to any applicable international estate tax treaty.
For more information on this topic, our whitepaper International Estate Planning for U.S.-Australia cross-border clients provides an in-depth analysis of international estate planning issues.
Contact Asena Family Office for a detailed understanding of how to plan your estate.