Estate Planning with Real Property in Multiple States

Estate planning with real property in multiple states can be a complicated matter. State laws are not uniform on how property may be owned or inherited. The tools available to convey property after you or your spouse pass away may also vary. While some tools may partially satisfy your goals, there may be unexpected issues that you have not considered.

You may know that upon your death, probate may be required to transfer ownership of assets you own solely in your name. For example, if your house was titled solely in your name, a probate is likely needed to transfer the property to your beneficiaries.

What you may not know is that if you individually own property in another state, like a summer or winter home, a second probate is usually needed in that other state to transfer that property. This is commonly called an ancillary probate. An ancillary probate proceeding may cause unnecessary expenses and delays in administering your estate that could be easily avoided with proper planning. There are several potential tools that may prevent this estate planning pitfall.

Joint Tenancy

A common real property ownership form for married couples is joint tenancy. After one owner passes away, the property generally passes to the survivor, avoiding probate. At first glance, this method may seem ideal; it is simple and avoids probate (ancillary or otherwise). However, without additional planning, the ancillary probate is merely postponed, as the survivor owner is left with an individual, 100% ownership interest. Thus, a probate proceeding will need to take place upon the surviving owner’s death.

Many people consider adding their children as joint tenants so they can inherit the property without probate. While this method may accomplish the probate-avoidance goal, it can create more issues than it resolves. The joint tenancy gives your child a current ownership interest in the property. Depending on the state’s property laws, the property could be forcefully sold if that child has any liability issues. The child could also potentially force the sale voluntarily.

Transfer on Death Deed

A transfer on death deed does as the name implies. When the property owner passes away, the property transfers to the beneficiary or beneficiaries named in the deed without probate. The deed is generally recorded with the appropriate authority where the property is located before the original owner passes away. Over half of the U.S. and Washington D.C. have some form of transfer on death deed.

The transfer on death deed process is usually simple and may be appropriate in many circumstances, especially where there is limited concern over estate taxes or potential beneficiary issues, such as liabilities, debt, or spendthrift issues. It does not create a current ownership interest for the beneficiary, which avoids many of the pitfalls of a joint tenancy.

Transfer on death deeds become less ideal in more complicated estates, such as estates potentially subject to an estate tax or when there may be an issue with a beneficiary. Without proper professional planning, opportunities to eliminate or mitigate estate taxes, protect assets, and avoid unnecessary expenses could be missed.

Transferring the Property to a Trust

Another probate avoidance tool for out-of-state property is transferring the property to a revocable trust, which becomes the property owner. By removing the property from individual or joint ownership into the trust, probate is avoided when you pass away. The trust can be designed so you and your spouse both manage the trust and enjoy the property, which includes selling, updating and maintaining the property.

Your revocable trust can also own other assets that may be subject to probate, including additional real property, bank accounts, brokerage accounts and business interests. This helps avoid probate both in your home state and the state where you own additional real property. You would still be able to access the assets and upon your passing, one document drives distributions to all your beneficiaries, making sure your intentions are met. The revocable trust also allows for tax-efficient estate planning and asset protection that may not be available if the property is jointly owned or by using a transfer on death deed.

An additional consideration to a revocable trust is the initial legwork of establishing the trust; a potential probate asset must be transferred to your trust during your lifetime, or the avoidance goal is defeated and probate is necessary. Additionally, not all assets should be transferred to a revocable trust, so professional assistance is critical to avoid a potential costly mistake.

Get the Proper Planning Tailored to Your Circumstances and Concerns

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