Own a residence in more than one state? Expect estate planning challenges

If you own a residence in more than one state, one of the first issues to consider is avoiding probate in multiple jurisdictions. When you pass away, each residence may be subject to probate in its respective state. This process, called ancillary probate, can be time-consuming and costly.

Ancillary probate is a term that becomes relevant when a decedent owned real estate (or other titled assets) in a state other than their primary state of residence at the time of their death. In essence, while the primary probate proceedings would occur in the decedent's domicile state, an ancillary probate would be required in any other state where they held property.

Instead of handling everything in one probate court, the estate must be processed in multiple jurisdictions. Each state will have its own proceedings, forms, procedures and timelines, all of which can cumulatively prolong the settlement of the estate.

If you have more proceedings and courthouses to visit, you can safely bet that legal expenses are likely to increase. The estate may need to retain separate attorneys in each state where property exists. This means additional legal fees and expenses, as each attorney will need to be compensated for their services.

Another hurdle is the potential for administrative complexity. Different states might have varying probate rules, requirements and documentation. Navigating these differences, especially if they conflict or are contradictory, can introduce added layers of complexity.

Also, when you deal with multiple jurisdictions, it tends to increase the potential for errors. With assets distributed across different jurisdictions and managed under varying laws, the potential for oversight or mistakes increases. Errors in probate can lead to disputes, legal challenges or further administrative complications, increasing the time and cost involved.

Probate has a reputation for sometimes being a long and tedious process. Having to navigate probate in more than one state is certain to add time to the estate settlement process. Just the sheer act of coordinating with multiple courts, perhaps in different time zones, and dealing with potentially unaligned timelines can extend the probate process' duration.

There’s also the human factor to consider, such as the emotional strain for beneficiaries. For families and beneficiaries, the prolonged and complex process of navigating multiple probate proceedings can be emotionally taxing. It can be distressing to wait for estate resolution and asset distribution, especially when compounded by the grief of losing a loved one.

Given these challenges, many estate planning professionals advise on measures to bypass or minimize the impacts of ancillary probate. One common recommendation is to use a revocable living trust to hold out-of-state properties, allowing for streamlined estate management and distribution of assets. Transferring properties into such a trust can help avoid ancillary probate, as the trustee can manage and distribute the assets according to the trust's terms without court intervention.

A revocable living trust is a legal entity that holds, administers and distributes an individual's assets during their lifetime and after their death. The person creating the trust, known as the grantor or settlor, can make changes to the trust or even dissolve it entirely during their lifetime, hence the term "revocable."

When a property is placed into a revocable living trust, the title of the property is transferred from the individual's name to the trust's name. Although the property is technically owned by the trust, the grantor maintains control and can continue to use the property as they see fit.

The central benefit concerning out-of-state properties is that, upon the death of the grantor, the assets held in the trust do not go through probate – neither primary nor ancillary. Instead, the assets are administered and eventually distributed according to the terms laid out in the trust document. This is because the assets in the trust are not considered part of the deceased's personal estate but belong to the trust itself.

Upon the grantor's death, the designated successor trustee takes over the trust's management. They are responsible for ensuring that the assets, including out-of-state properties, are managed or distributed as outlined in the trust agreement. This transition typically occurs without court involvement, providing a smoother and more private shift than probate would allow.

Because the need for ancillary probate is sidestepped, the costs and time associated with legal proceedings in another state are eliminated. There is no need for multiple attorneys or paying court fees in different jurisdictions. Also, if the grantor becomes incapacitated, the trust ensures that the assets, including out-of-state properties, continue to be managed effectively by either the grantor (if they have the capacity) or the successor trustee.

While a revocable living trust offers many benefits, especially concerning out-of-state properties, it’s crucial to remember that the trust must be properly funded, meaning that assets must be correctly titled in the trust's name to avoid probate. Also, a trust doesn't replace a will entirely; a "pour-over" will is typically executed alongside to capture any assets unintentionally left out of the trust.

Because states have different requirements for trust formation and administration, it’s important to consult with an experienced estate planning attorney to ensure that a revocable living trust is set up and maintained appropriately for your specific needs and in the states where you have residences.

There are tax implications to consider if you have residences in more than one state. Different states might have unique estate or inheritance tax regulations. Navigating the tax implications in multiple states, ensuring compliance and potentially paying state-specific taxes can add to the estate's financial burden.

First, it's crucial to understand the distinction between federal estate taxes and state estate taxes. The federal estate tax applies to the entire estate, regardless of where the properties are located. In contrast, state estate taxes apply based on the jurisdiction of each property.

Not every state imposes an estate tax. Some states have no estate tax at all, while others might have both an inheritance tax and an estate tax. The exemption limits and the rates at which these taxes are levied can vary significantly from one state to another.

Even if your primary residence (domicile) is in a state without an estate tax, you could still be liable for state estate taxes in states where you own property. For instance, if you have your primary residence in Florida (a state without an estate tax) but own a vacation home in New York (which does have an estate tax), your estate could owe New York estate taxes on the value of that vacation home.

The key challenge with multi-state residences is potentially being subject to multiple state estate tax regimes. In worst-case scenarios, an individual's estate might end up paying taxes in several states, significantly diminishing the inheritance passed on to heirs.

Some states offer tax credits if you've already paid estate taxes in another state. This can reduce the burden, but it's essential to be aware of these provisions and plan accordingly.

Keep in mind that estate tax laws are not static. They can change based on legislative shifts in any given state. Therefore, if you own residences in multiple states, it's crucial to regularly review your estate plan to account for any changes in state tax laws.

Many states offer homestead exemptions that can protect your primary residence from creditors and reduce property taxes. However, you can typically only claim this exemption in your domicile state.

A homestead exemption often serves a dual purpose. First, it can protect a primary residence from certain creditors, ensuring that individuals do not lose their homes because of economic hardships. Second, it can provide tax advantages by reducing the taxable value of the home, leading to lower property taxes.

While the specifics can vary by state, generally, homestead exemptions are only available for an individual or family's primary residence. This means you cannot claim homestead exemptions in multiple states. If you try to, you could face legal consequences, including fines, and you'd be required to pay back any improperly claimed benefits.

The decision on where to claim a homestead exemption might also be influenced by other estate planning considerations, such as differing state inheritance tax laws or the desire to establish residency in a state with more favorable tax laws.

Another estate planning issue to consider if you have residences in more than one state involves your powers of attorney, which name surrogate decision makers for health care and financial matters, and your living will, also known as an advance directive, which details your instructions for end-of-life medical treatment preferences. What's accepted in one state might not be in another.

The issue is that documents like powers of attorney or living wills tend to be state-specific. A document from one state that grants authority to someone to make financial or health care decisions on your behalf may not be recognized by institutions – such as banks and hospitals – in other states. One solution to consider is having separate advance directives and powers of attorney for each state or having a single, comprehensive document that complies with the laws of all relevant states.

Owning residences in multiple states can complicate estate planning and financial management, especially if these states have different legal frameworks for property ownership. Two primary systems in the U.S. are common law ownership (often referred to as "separate property") and community property ownership. Understanding the differences between these systems is essential for individuals with residences or other assets in states that span both systems.

Most U.S. states operate under the common law system. In common law states, the name on the title determines property ownership. If you purchase a property and put it in your name, it's yours alone, even if you're married. Property acquired as a gift or inheritance is the separate property of the recipient, even if received during the marriage.

The ownership system can affect estate tax calculations. In community property states, the total value of community property gets a "step-up" in basis upon the death of one spouse. This can have significant tax advantages when the surviving spouse sells assets. Selling property can be different in community property states, especially if one spouse acquired it before marriage. Both spouses may need to agree to the sale in community property states, even if only one name is on the title.

Owning residences in both common law and community property states can create complexities, especially if a couple moves from one system to another. For example, a couple moving from California (a community property state) to New York (a common law state) might face challenges in determining the ownership structure of assets acquired during their marriage in California. It’s important to review joint ownership structures for properties in each state and ensure they align with your estate planning goals.

Navigating the legal landscapes of multiple states can be complex. You may need professional guidance for each state where you own property to ensure compliance with local laws and to capitalize on state-specific estate planning strategies.

Indeed, while owning residences in multiple states can offer numerous benefits, it also introduces layers of complexity to estate planning. Proactive planning and an understanding of the unique challenges involved can mitigate potential complications, ensuring that your estate is settled according to your wishes with minimal stress for your loved ones.