Leaving California: Domicile, the 546-Day Rule and the Estate Plan

Part I. Residence and domicile under California law

California’s income tax reaches every individual who is in the state for other than a temporary or transitory purpose and every individual domiciled in the state who is outside it for a temporary or transitory purpose (Rev. & Tax. Code § 17014(a)). A resident who is temporarily absent remains a resident (§ 17014(c)), and a person who spends more than nine months of the year in the state is presumed to be one (§ 17016). Residents are taxed on all income regardless of source (FTB Publication 1100).

Domicile is the place where an individual has the true, fixed, permanent home and principal establishment, to which the individual intends to return whenever absent; a person has only one at a time. A domiciliary who leaves keeps the California domicile as long as there is a definite intention of returning, and loses it on abandoning that intention and settling elsewhere with the intention of remaining indefinitely. Residence is a separate question: a domiciliary outside the state for other than a temporary or transitory purpose ceases to be a resident, and the state with which a person has the closest connection during the year is the state of residence (18 Cal. Code Regs. § 17014(a), (c)).

Part II. The connections the Franchise Tax Board weighs

The Franchise Tax Board’s guidelines list the connections it examines and state that no single factor decides: the state of the driver’s license, vehicle registrations, professional licenses and voter registration; the location of physicians, accountants and attorneys, of the place of worship and of clubs; the time spent inside and outside California; the location of the principal residence, of real property and investments, and of the spouse and children; the banks used and the origin of financial transactions; and the permanence of work assignments in California (FTB Publication 1031).

In the firm’s experience the registrations are the easy part and the decisive facts are time and the home actually lived in. A person who keeps the California house available, spends more days in California than anywhere else and leaves the family there has rarely left. A record of location, kept day by day from the year of the move with calendars, travel records and card statements, is the evidence an audit asks for.

Part III. The 546-day rule

One statutory rule replaces the weighing of connections. A domiciliary absent from California for an uninterrupted period of at least 546 consecutive days under an employment-related contract is considered outside the state for other than a temporary or transitory purpose (Rev. & Tax. Code § 17014(d)). Returns totaling not more than 45 days in a taxable year are disregarded (§ 17014(d)(1)). The rule does not apply to an individual with income from stocks, bonds, notes or other intangible property above USD 200,000 in any taxable year in which the contract is in effect, tested for each spouse separately (§ 17014(d)(2)), or where the principal purpose of the absence is to avoid California tax (§ 17014(d)(4)). A spouse who accompanies the employee for at least 546 consecutive days is treated in the same way (§ 17014(d)(3)). The Franchise Tax Board’s Chief Counsel has concluded that an independent contractor relationship may qualify as an employment-related contract (FTB Chief Counsel Ruling 2000-01).

The rule does not serve a retirement, a sabbatical or a move for family reasons; those departures are decided on the connections of Part II, and a domiciliary abroad remains a resident unless the absence is for other than a temporary or transitory purpose (§ 17014(a)(2)). California does not apply treaties that expressly limit their application to federal income taxes and allows neither a foreign tax credit nor the foreign earned income exclusion (FTB Publication 1031), so that a resident abroad pays California tax on the foreign salary.

Part IV. California income after the move

A nonresident’s gross income includes only income from California sources (Rev. & Tax. Code § 17951(a)). Income from stocks, bonds, notes and other intangible property is not California-source unless the property has a business situs in the state or the trading amounts to doing business there (§ 17952). Rent from California real property, gain on its sale and compensation for services performed in California remain California-source (FTB Publication 1031), and wage income from employee stock options is taxed on a source basis; the tax is computed at the effective rate the taxpayer’s total income would bear as a resident (FTB Publication 1100).

Qualified retirement income received for a period of nonresidence is excluded: distributions from qualified plans, individual retirement plans, section 403 and section 457 arrangements and governmental plans, and nonqualified deferred compensation paid in substantially equal periodic payments for life or for at least ten years (§ 17952.5(a), (b)). Lump sums from most nonqualified plans with a California source remain taxable (FTB Publication 1031).

A sale of California real property is subject to withholding by the buyer of 3 1/3 percent of the sales price or, at the seller’s election, of the certified gain multiplied by the highest individual rate (Rev. & Tax. Code § 18662(e)(2)). No withholding is required where the price does not exceed USD 100,000, or on the seller’s certificate that the property was the seller’s principal residence within the meaning of I.R.C. § 121, was last used as such, or is sold at a loss (§ 18662(e)(3)).

Part V. Community and quasi-community property

Property, real or personal and wherever situated, that a married person acquires during the marriage while domiciled in California is community property (Fam. Code § 760); at death, half belongs to the surviving spouse and half to the decedent (Prob. Code § 100). Quasi-community property, property acquired while domiciled elsewhere that would have been community property had the acquirer been domiciled in California (Prob. Code § 66), is divided in the same way only at the death of a person domiciled in California (Prob. Code § 101); once the domicile has moved, that rule no longer reaches the estate. For California real property that is not community property, the surviving spouse of a decedent domiciled elsewhere may elect against the will as though the property were located in the domicile (Prob. Code § 120).

The character acquired in California keeps a federal value. The surviving spouse’s half of community property held under the community property laws of any state takes a new basis at the first death if at least half of the community interest is included in the decedent’s gross estate (I.R.C. § 1014(b)(6)). Community property transferred to a revocable trust remains community property if the trust is revocable as to it and changes require both spouses, and keeps that character when withdrawn unless transmuted (Fam. Code § 761(a), (b)). A schedule of community assets and a trust drafted to preserve their character keep the record; whether the new state honors that character at death is a question of its law.

Part VI. Real property, the trust and the documents

California real property of a person who dies domiciled elsewhere is administered through an ancillary administration, a proceeding in California for the estate of a nondomiciliary decedent (Prob. Code § 12501), opened by a petition for probate of the will or appointment of a local personal representative (Prob. Code § 12510) in a county where property is located (Prob. Code § 7052). Title held by the trustee of a funded revocable trust keeps the property out of the decedent’s own name. The ancillary probate guide sets out the procedure.

The trust stays within California’s reach through its people. A trust’s entire taxable income is taxable in California if a fiduciary or a beneficiary whose interest is not contingent is a resident, regardless of the settlor’s residence (Rev. & Tax. Code § 17742(a)), apportioned where only some fiduciaries are residents (§ 17743); a trust that becomes irrevocable at death with a California successor trustee becomes a California taxpayer. The will, the trust and the powers of attorney and health care directives are re-executed after the move, reciting the new domicile, with counsel admitted in the new state.

Part VII. A move abroad: the federal side

Leaving the United States does not end federal taxation of a citizen. Citizens, wherever resident, are taxed on income from all sources (Treas. Reg. § 1.1-1(b)), and the income tax treaties preserve that taxation through their saving clauses (for example Article 1(4)(a) of the income tax treaty with Germany, as amended in 2006). The estate tax is imposed on the taxable estate of every citizen (I.R.C. § 2001(a)), and the gross estate includes property wherever situated (I.R.C. § 2031(a)). For a person who is not a citizen, estate tax exposure turns on domicile, acquired by living in a place with no definite present intention of leaving and changed only by an actual move (Treas. Reg. § 20.0-1(b)(1)); the article on US persons for transfer tax purposes treats that test.

The firm is led by attorney Caroline Esche Ashford, PhD, JD. A graduate of Columbia University Law School, her practice focuses on international estate planning and the cross-border taxation and administration of estates and trusts, including the domicile and residence of individuals who move between states and countries. Dr. Ashford is also licensed to practice law in Germany. She advises in French and German as well as English.