Globalization and Blurred Borders, Part One: Succession
Written by Partner David I. Faust, Gallet Dreyer & Berkey, LLP. Featured in New York Law Journal.
Although international borders are becoming blurred where people, money and commerce move across the world with ease and dual citizenship is commonplace, there are still at least two areas where the lines on maps remain clear: taxes and succession. The more peoples’ personal and business lives become globalized, the more important it is for them to be aware of both tax and succession consequences. This article will deal with succession; a subsequent article will deal with taxes.
International borders are becoming blurred to a point close to disappearing. People, money and commerce move across most of the Western world with unprecedented ease. The nationality of corporate entities is increasingly conjectural. Businesses manufacture, buy, sell, finance themselves and operate on a global basis. Dual citizenship for individuals is increasingly common. Families consisting of spouses and children of different nationalities are no longer considered unusual. What is true internationally is also true with respect to interstate personal and business interactions.
There are, however, still at least two areas where the lines on maps, whether drawn by conquest or diplomacy, remain clear: succession and taxes. The more peoples’ personal and business lives become globalized, the more important it is for them to be aware of succession and tax consequences. This article will deal with succession; a subsequent article will deal with taxes.
A basic, generally recognized principle of succession is that the succession of real property is governed by the laws of the jurisdiction in which it is located; personal property succession is governed by the laws of the deceased owner’s domicile. Unlike citizenship or residency, which are fairly objective concepts, “domicile” is highly subjective. It is commonly understood as a matter of intent: where does a person consider his or her home to be; where will they live if business or other considerations did not dictate living where they now live. This intent must be supported by facts.
Some jurisdictions presume that the place of one’s birth is the permanent domicile and requires the strongest, most compelling evidence to support a contrary assertion.
Determining domicile is not only an international matter. The matter of domicile has received particular attention in New York City and New York State in the tax context. The test of residence is fairly objective; the test for domicile is subjective. The New York State Tax Law, which has been adapted by New York City, defines domicile as “…in general,…the place which an individual intends to be such individual’s permanent home—the place to which such individual intends to return whenever such individual may be absent.” N.Y. Tax Law 605(b)(1)(d)(1).
However, the very next provision (N.Y. Tax Law 605(b)(1)(d)(2)) provides that, “A domicile once established continues until the individual in question moves to a new location with the bona fide intention of making such individual’s fixed and permanent home there.” Succeeding language in this clause makes clear that: “The burden is upon any person asserting a change of domicile to show that the necessary intention existed.”
Thus, changing domicile requires both a move to a new location and provable bona fide intent to make that new location his or her domicile. In a retrograde complication, the New York Tax Code also provides (§ 605(b)(1)(d)(5)(i)) “Generally, the domicile of a husband and wife are the same…If they are separated in fact, they may each, under some [undefined] circumstances, acquire their own separate domiciles even though there is no judgment or decree of separation.”
The difficulties of establishing a change of domicile may be found in The Matter of Petition of Eileen Taylor (New York Division of Tax Appeals Determination 822824 decided July 8, 2010) which should be compared with The Matter of Petition of Cooke (New York Division of Tax Appeals Determination 823591 decided November 15, 2012).
A comprehensive summary of the factors New York Courts use to determine domicile may be found at pages 14-15 of the Cooke Determination:
Whether there has been a change of domicile is a question “of fact rather than law, and it frequently depends upon a variety of circumstances which differ as widely as the peculiarities of individuals.” The test of intent with regard to a purported new domicile is “whether the place of habitation is the permanent home of a person, with the range of sentiment, feeling and permanent association with it.” While certain declarations may evidence a change in domicile, such declarations are less persuasive than informal acts which demonstrate an individual’s “general habit of life.” (Internal citations omitted.)
In Matter of McKone v. State Tax Commission (111 AD2d 1051, 490 NYS2d 628 [3d Dept 1985], affd 68 NY2d 638, 505 NYS2d 71 ), the court favorably quoted the following treatise on the intent necessary to establish domicile:
The intention necessary for acquisition of a domicile may not be an intention of living in the locality as a matter of temporary expediency. It must be an intention to live permanently or indefinitely in that place. But it need not be an intention to remain for all time; it is sufficient if the intention is to remain for an indefinite period. (25Am Jur 2d Domicile §25, at 19 .)
While the standard is subjective, courts look to certain objective criteria to determine whether a taxpayer’s general habits of living demonstrate a change of domicile. “[T]he taxpayer must prove his subjective intent based upon the objective manifestation of that intent displayed through his conduct” (Matter of Simon, New York Tax Appeals Tribunal, March 2, 1989).
Among the factors that have been considered, in addition to drivers licenses, telephone and utility bills, voter registrations, locations of bank accounts, membership in social clubs and religious organizations, are: (1) the retention of a permanent place of abode in the claimed domicile; (2) the location of business activity; (3) the location of family ties; (4) the location of social and community ties; (5) schools at which children are enrolled; and (6) formal declarations of domicile.
The facts and circumstances of each case must be evaluated separately. For example, someone posted to the U.S. by a foreign company or government may have every intent to return home after that posting but will get a U.S. drivers license, may not keep a residence or bank account or club memberships in the home country, join U.S. clubs, etc.
Although the foregoing analysis of domicile comes largely from tax cases, it should be relevant, if not dispositive, in determining domicile for succession purposes.
It is beyond the scope of this article to note all of the differences in succession laws within the United States or internationally. The basic difference is this:
- Some jurisdictions allow free disposition of an estate, net of debts and taxes, providing only that one cannot disinherit a spouse in the absence of a valid pre or post nuptial agreement.
Within the United States, the laws of intestate succession (who inherits if a decedent does not leave a valid will and there is no valid pre or post-nuptial agreement) and spousal elective rights (what a spouse is entitled to as a matter of law in the absence of a valid pre or post-nuptial agreement, and if a will purports to give him or her less) vary substantially from state to state. In at least one state, a spouse’s rights depend on whether they are the first spouse of the decedent and if they had children together. In New York, absent agreement to the contrary, a spouse is generally entitled to the greater of $50,000 or one-third of a decedent’s net estate, whether or not there are children of the marriage or whether the deceased was previously married.
- Some jurisdictions, primarily those which derive their laws from the Napoleonic Code, provide for “forced heirship,” i.e., a spouse has limited rights, the bulk of the estate must go to the decedent’s issue, with only a small fraction being at the free disposition of the decedent.
- Some jurisdictions, primarily those that follow Sharia, provide for no disposition by a decedent; the estate goes to the spouse and issue in fixed and immutable percentages.
One simple example should suffice. Suppose a New York citizen/domiciliary/resident owns a vacation home in France. On death, that real estate passes to his or her children as a matter of law; they cannot be deprived of that property by a will recognized in New York, although disinheriting children in favor of a spouse is quite common in the United States. On the other hand, a portfolio of French securities should pass under a New York will, pursuant to which children can be disinherited with or without reason.
With multi-national estates, probate must also be considered. For example, suppose an Israeli domiciliary has property, real or personal, in New York. A will is accepted in Israel, but typically no executor or administrator is appointed.
The lack of a court appointed executor or administrator makes ancillary probate in New York difficult and time consuming. A practitioner advising a foreign client with U.S. assets should be aware of this and make sure that when the Israeli will is probated in Israel an administrator is requested.
The United States is party to a vast network of income and estate treaties dealing with the taxation of multi-national people and estates. I am aware of no such U.S. treaties dealing with succession and, in any event, such treaties are not binding on the states, where jurisdiction on succession resides.
The take-away should be this: If a client’s business or personal affairs in any material way crosses borders, an attorney giving estate planning advice must think beyond the borders of his or her license and seek advice from counsel in the other relevant jurisdictions.