Move First, Convert Second: Changing Residency Before a Liquidity Event
New York decides residency on facts, not forms, and it reads the E-ZPass records. A move ahead of a bonus, sale or Roth conversion has to be real, and the question of who should own the asset comes even earlier.
Thinking about leaving New York for Florida before a major income event? That could be a large bonus, a business sale, a Roth conversion, stock option or restricted stock income, a carried interest payout, the sale of investment real estate, deferred compensation, or some other liquidity event. The instinct is sound. The execution is where families get into trouble, because New York does not take your word for it.
Two separate hooks
New York taxes residents on all of their income, and it has two independent ways to call someone a resident. The first is domicile, the place a person treats as a permanent home. Domicile continues until the taxpayer proves by clear and convincing evidence that it was abandoned and a new one acquired. The second is statutory residence: a person who keeps a permanent place of abode in New York and spends more than 183 days in the state during the year is a New York resident regardless of domicile.1 Any part of a day in New York generally counts as a New York day, so a morning meeting in Manhattan before a flight home is a full day for the count.2
A Florida declaration of domicile, a Florida driver's license, voter registration and a homestead exemption all help.3 None of them decides the case. The auditor looks at where the taxpayer actually lives, sleeps, works, receives medical care, keeps the things he cares about and maintains his closest connections. The Department's own audit guidelines frame domicile around five primary factors: the home, active business involvement, time, near and dear items and family.4
What a residency audit actually examines
In a residency audit, New York may request E-ZPass toll records, cell phone location data, credit card statements, travel records, utility usage, social media and a day by day account of every time the taxpayer set foot in the state. The burden is on the taxpayer, and the taxpayer who cannot document his days loses them. People who have kept a New York apartment while "moving" to Florida are the usual casualties, because the apartment supplies the permanent place of abode and the undocumented days supply the rest.
For Roth conversions the conversion itself is rarely the fight. Conversion income from an IRA is intangible income, so a true nonresident owes New York nothing on it. The fight is over whether the taxpayer was still a New York resident on the conversion date. For a part year resident, New York taxes the income received during the resident period, with special accrual rules that can pull income the taxpayer had a right to receive before the move into the New York period.5 So the sequence matters: move first, convert second, and leave a comfortable interval between them.
The earlier question: who should own the asset
For sales and liquidity events, the planning window opens even earlier than the residency window. Before the sale, before the term sheet and before any binding commitment, the family should ask who should own the asset when the gain is realized. A business interest, a concentrated stock position, investment real estate, a fund or carried interest, or a life insurance policy may be better positioned inside a properly structured irrevocable trust before the value is realized.
A South Dakota irrevocable trust can combine long term governance, estate and generation skipping tax planning, asset protection and professional fiduciary administration. If the trust is a nongrantor trust, it is a separate taxpayer, and New York does not tax a nonresident trust that has no New York trustee, no New York situs assets and no New York source income.6 A grantor trust, by contrast, keeps the income on the settlor's return, so it solves the estate tax problem but not the state income tax problem. Which is right depends on the facts and on whether the family's priority is transfer tax, income tax or both.
The takeaway
A residency change is won with facts, not forms. It takes a real move, a real severing of the New York connections and records that prove both. And the most valuable planning for a liquidity event happens before the event, when the question is not how to shelter a gain that already exists but who should own the asset that is about to produce it.
Notes
- N.Y. Tax Law section 605(b)(1)(A), (B); 20 NYCRR 105.20. The Court of Appeals held in Matter of Gaied v. Tax Appeals Tribunal, 22 N.Y.3d 592 (2014), that a dwelling counts as a permanent place of abode only if the taxpayer has a residential interest in it. ↩
- 20 NYCRR 105.20. ↩
- Fla. Stat. section 222.17 authorizes a sworn declaration of domicile filed with the clerk of the circuit court. ↩
- N.Y. State Dept. of Taxation and Finance, Nonresident Audit Guidelines (2014); 20 NYCRR 105.20(d). ↩
- N.Y. Tax Law sections 638 and 639. ↩
- N.Y. Tax Law section 605(b)(3)(D). New York taxes accumulation distributions from such a trust to a New York resident beneficiary and treats incomplete gift nongrantor trusts as grantor trusts; see sections 612(b)(40) and 612(b)(41). ↩
Terry L. (T. L.) Turnipseed, J.D., LL.M., CTFA, is a tax, trust and estate attorney in Fort Lauderdale, Florida, and Head of Estate and Tax Planning at Alta Trust Company. He is a former tenured professor of law at Syracuse University. Reach him at tl@turnipseed.law or on LinkedIn. This article is general information, not legal advice.