Paradox of Mental Incapacity in State Estate Tax: How Moving Your Elderly Parent from Florida May Generate an Unexpected Estate Tax

It is difficult enough for families to come to grips with having to care for an elderly parent that may no longer be able to live on their own.  After coming to terms with this unfortunate reality, the next steps often involve moving that parent into their home, an assisted living facility or a nursing home nearby.  With all of this turmoil, it should be no surprise that most people would not consider whether such a move may create a significant estate tax liability should that parent die, even if it is shortly after such a move.  Your parent could live their entire post-retirement life in a state such as Florida where there is no estate tax and when they are no longer able to live on their own, you bring them to your home state.  If you pack your parent up, sell his or her home and get them established in new living quarters in New Jersey, should they die even a few months later, their entire estate could be subject to an expensive New Jersey estate tax.  How could this be?  Because New Jersey will take the position that your parent had either voluntarily changed his or her domicile, or if incompetent to do so, he or she has taken the domicile of their guardian.  What does this mean?

A change of domicile occurs when there is both a physical presence in the new locality (with an intention to permanently relocate) and an intention to abandon the old domicile.  In other words, once you permanently move to a new home and abandon your old home, you avail yourself to your new home’s tax laws. What about the adult who lacks (or who may soon lack) the capacity to change his / her domicile voluntarily and by his or her own act?   In New Jersey, domicile may be acquired in one of three ways: (1) through birth or place of origin; (2) through choice by a person capable of choosing a domicile; and (3) through operation of law in the case of a person who lacks capacity to acquire a new domicile by choice.  Importantly, even after an adjudication of mental incompetence, a person may nevertheless possess sufficient mental capacity to elect a new domicile, and it is generally recognized that his or her actual capacity to do so is a question of fact.  However, once incompetency has been shown, there is a presumption that the incompetent lacks the mental capacity to make such a choice and the burden of showing that he or she in fact possessed the necessary mentality shifts to the party claiming that his domicile had been changed.  How does the NJ Division of Taxation view it?

The 1969 Appellate Division case Estate of Gillmore is the authority for the above and very much remains good law today.  In Gillmore, the executors of the decedent’s estate appealed from an assessment of the New Jersey Inheritance Tax Bureau against the estate. Two years before Gillmore’s death, having become hopelessly senile, the decedent was moved from her New York apartment by her brother, who was named her guardian, into his New Jersey home for several weeks, and thereafter placed in a New Jersey nursing home. The executors claimed that the decedent had never been a New Jersey domiciliary, a prerequisite to assess tax.  The Court affirmed a judgment for the Tax Bureau on the grounds that the decedent, though incapable of acquiring a domicile other than New York by choice, acquired one in New Jersey by operation of law through the guardian.  This decision is reinforced by New Jersey law that provides that a guardian of the person has the authority to “establish the incapacitated person’s place of abode within or without this state.” N.J.S.A. 3B:12-57(a).  The New Jersey Division of Taxation continues to take the position that if your parent dies in New Jersey after having moved here, even if only for a short period of time, in most instances, they are expecting a check based on the value of their entire estate.

New York Courts have taken the opposite position in holding that an adjudication of incompetency and the appointment of a guardian for the incompetent is as a matter of law conclusive as to the incompetent’s legal incapacity to change domicile by his or her own act until he or she has been judicially recognized as competent or has been restored to sanity by a court of competent jurisdiction. This rule is apparently based on the following considerations: (1) that a person adjudged incompetent by a court is presumed to be incapable of choosing a new domicile; and (2) that only the court, which adjudged him or her incompetent retains control and only that court can determine a whether the incompetent’s domicile changed. This holding was originally set forth in the case In re Meyer’s Estate, 59 Misc. 2d 507, 299 N.Y.S.2d 731, 734 (Sur. Ct. 1969), which has also continues to be cited in current cases and remains good law today.

Believe it or not, New York is now a much more friendly estate tax home than New Jersey.  New York has no inheritance tax and its estate tax exemption is scheduled to be in line with the federal exemption in 2019.  New York’s currently exempts $4,187,500 where New Jersey exempts only $675,000.  Although there is pending legislation that may raise New Jersey’s estate tax exemption, it is unclear if that law will pass.

There is no suggestion by the authors to turn away an elderly parent in need of new living quarters in favor of potential New Jersey estate tax savings.  However, there are many steps that you can take as their advocate to avoid a New Jersey estate tax trap for your elderly parent who may be living in a no estate tax jurisdiction such as Florida.  If your parent lacks (or who may soon lack) capacity, but has lucid moments and is not completely incapacitated, you may be able to take effective steps to preserve their old domicile and avoid an unnecessary New Jersey estate tax upon their death.  These steps may include: (i) not establishing a new domicile in New Jersey; or (ii) not abandoning your parents’ former domicile in Florida.  There are several specific steps that you and your elderly parent can do to bolster the position that they are not subject to New Jersey estate tax notwithstanding that they may have been living in New Jersey before he or she passed.  Managing your elderly parents’ affairs is never easy.  Adult children who care for their parents, however, must be mindful of this potential tax trap. Once you get your parent set up in their new living quarters, it is imperative that you consult with an experienced state and local tax professional for tax planning advice.