Handling Out-of-State Property in Your Estate Plan

Estate planning becomes more complex with out-of-state real estate due to differing state laws governing property. Owning property in another state introduces unique legal and administrative challenges regarding ownership, transfer, taxation, and probate. A plan suitable for your home state might not suffice for properties in other states, potentially leading to complications. The primary concern is often multiple probate proceedings, which can be lengthy and expensive for beneficiaries.

The Core Problem: Ancillary Probate

To appreciate the solutions, one must first apprehend the principal problem: ancillary probate. This legal formality is often the main source of headaches when out-of-state real estate is involved.

What is Probate?

Probate is the court-supervised legal process used to validate a deceased person’s will (if one exists), gather their assets, pay outstanding debts and taxes, and distribute the remaining property to the rightful beneficiaries or heirs. It takes place in the state where the deceased person had their primary legal residence, or “domicile.” For assets located in that domiciliary state, this single probate process is generally sufficient.

The Ancillary Probate Trap

When a decedent owns real estate in a state other than their domicile, a secondary probate proceeding, known as “ancillary probate,” is typically required in that other state. For instance, if your permanent home is in New York but you own a rental property in Florida, your main (domiciliary) probate will occur in New York. However, to legally transfer the Florida property title to your heirs, your executor will likely need to initiate ancillary probate in a Florida court.

This additional legal proceeding presents several drawbacks:

• Increased Costs: Ancillary probate means more court fees, filing expenses, and often the necessity of hiring a separate attorney in the state where the property is located. These expenses are in addition to the costs of the primary probate.
• Significant Time Delays: Managing probate in one state is already a lengthy affair; coordinating it across two or more states can extend the settlement of your estate considerably, delaying distributions to your beneficiaries.
• Added Complexity and Stress: Your executor, who may already be grieving, faces the magnified burden of navigating another state’s distinct legal system, finding local representation, and overseeing assets from a distance.
• Public Record: Like domiciliary probate, ancillary probate is a public process. Details about your out-of-state property, its value, and its recipients become part of the public record in that ancillary jurisdiction.

Domicile vs. Situs

Two terms are fundamental in this context:

• Domicile: This refers to your legal permanent home – the place you intend to remain indefinitely and to which you return after any absences. Your domicile dictates which state has primary jurisdiction over your estate.
• Situs: This term refers to the actual physical location of real estate. The “law of situs” is a legal principle stipulating that real property is governed by the laws of the state in which it is located.

It is the law of situs that necessitates ancillary probate for out-of-state real estate, as the courts of the situs state have exclusive jurisdiction over real property within their borders.

Key Legal Concepts and Considerations

When devising a strategy for out-of-state property, several legal principles and practical matters come into play. Awareness of these can significantly shape your planning approach.

State-Specific Property Laws

Real estate law is notably state-specific. What is common practice or legally defined one way in your home state may be quite different where your other property is located.

Community Property vs. Common Law: States are generally categorized as either community property states or common law states.

• In community property states (such as California, Arizona, Texas, and others), most property acquired by either spouse during the marriage is considered owned equally by both, regardless of whose name is on the title. This has significant implications for how property is owned, managed, and distributed upon death or divorce. If you own property in a state like California, perhaps a duplex in La Mesa, California, these rules will apply to that asset.
• In common law states, property ownership is typically determined by whose name is on the title. Spouses can own property separately.

Forms of Joint Ownership: How property is titled when owned by more than one person greatly affects its transfer upon death.

• Tenancy by the Entirety (TBE): Available only to married couples in some states, TBE offers rights of survivorship and often some creditor protection.
• Joint Tenancy with Right of Survivorship (JTWROS): With JTWROS, when one owner dies, their interest automatically passes to the surviving joint tenant(s) outside of probate.
• Tenancy in Common (TIC): Each owner holds a distinct, separate share of the property. There is no right of survivorship; upon an owner’s death, their share passes to their beneficiaries via their estate (and thus, through probate if not otherwise planned for).

Homestead Exemptions: Many states offer homestead exemptions that can protect a certain amount of a primary residence’s value from creditors. While generally applying to the domiciliary residence, it’s worth noting that the availability and extent of such protections for out-of-state property for heirs can vary, and specific state laws would need to be reviewed.

Estate Taxes and Inheritance Taxes

While often conflated, these are different types of taxes that can impact an estate.

Federal Estate Tax: The federal government imposes an estate tax on very large estates. There is a substantial exemption amount (the “unified credit”), meaning most estates do not owe federal estate tax. This tax applies to all of your assets, regardless of where they are located.

State Estate or Inheritance Taxes: More pertinent to out-of-state property planning is that a number of states have their own estate tax (levied on the deceased’s estate) or an inheritance tax (levied on the beneficiaries receiving assets). If you own property in a state with such taxes, your estate or your beneficiaries might owe tax to that state, even if you are not a resident there. The rules for non-residents can be intricate.

Will vs. Trust Validity

How your primary estate planning documents are treated across state lines is also a key element.

Full Faith and Credit Clause: The U.S. Constitution’s Full Faith and Credit Clause generally requires states to recognize the public acts, records, and judicial proceedings of every other state. This means a will validly executed in your home state will typically be considered valid in another state. However, this does not mean your will avoids ancillary probate for real estate in that other state; the property must still go through that state’s probate process to transfer title according to the terms of your (valid) will.

Trust Recognition: Revocable living trusts are widely recognized across all states. When out-of-state property is properly titled in the name of a trust, the trust document (a private contract) governs its disposition, effectively bypassing the probate process in both your domicile state and the situs state of the property. This portability is a significant advantage of trusts.

Strategies for Incorporating Out-of-State Property into Your Estate Plan

Several strategies can be employed to manage out-of-state property effectively and avoid the pitfalls of ancillary probate. The optimal choice depends on your individual circumstances, the nature of the property, and your overall goals.

The Revocable Living Trust: The Gold Standard

For many individuals with out-of-state property, a revocable living trust is the most comprehensive and flexible solution.

How it Works: You create a trust document and then transfer legal ownership of your out-of-state real estate (and potentially other assets) from your individual name into the name of the trust. You, as the grantor, typically also serve as the initial trustee, retaining full control and use of the property during your lifetime. Upon your incapacity or death, a successor trustee whom you have designated steps in to manage or distribute the trust assets according to the specific instructions you laid out in the trust agreement.

Benefits:

• Avoids Ancillary Probate: Since the trust (a legal entity) owns the property, not you as an individual, the property does not need to pass through probate in any state.
• Privacy: Trust administration is a private process, unlike public probate court proceedings.
• Continuity of Management: Ensures seamless management of the property if you become incapacitated, as the successor trustee can step in without court intervention.
• Flexibility: Trusts can accommodate complex distribution plans, provide for beneficiaries with special needs, and manage assets over extended periods.

Funding the Trust: This is a vital step. A trust only controls assets that are legally titled in its name. For real estate, this means executing and recording new deeds for each out-of-state property, transferring ownership to the trust. For example, properly deeding your vacation home in La Mesa, California, into your trust is essential for the trust to be effective for that property.

Important Considerations: Thoughtful selection of a successor trustee who is capable and willing to manage the trust assets (which might include overseeing out-of-state properties) is key. You should also periodically review the trust to ensure it aligns with any changes in your life or the law.

Joint Ownership with Right of Survivorship (JTWROS)

This form of ownership allows property to pass directly to the surviving owner(s) outside of probate.

How it Works: When one joint owner dies, their interest in the property automatically transfers to the surviving joint owner(s) by operation of law.

Pros: Appears simple and directly avoids probate for the transfer between joint owners.

Cons:

• Loss of Control: You give up sole control; the property could be subject to the other owner’s creditors or marital disputes.
• Potential Gift Tax Issues: Adding a non-spouse as a joint owner can have gift tax implications.
• Exposure to Co-owner’s Creditors: The property might be reachable by the creditors of any joint owner.
• Does Not Address Simultaneous Death: If all joint owners die simultaneously, the property may end up in probate.
• Doesn’t Avoid Probate for Last Survivor: When the last surviving owner dies, the property will then be subject to probate unless they have implemented further planning.

Transfer-on-Death (TOD) or Beneficiary Deeds (where available)

A newer option in some states, TOD deeds allow for direct transfer of real estate upon death.

How it Works: You record a deed during your lifetime that names a beneficiary (or beneficiaries) to inherit the property automatically upon your death, without probate. You retain full ownership and control during your life.

Pros: Relatively simple and inexpensive way to avoid probate for a specific piece of property.

Cons:

• Not Available in All States: This is a major limitation. While states like California do permit Transfer-on-Death deeds for real property (which could be an option for a property in La Mesa, California, for example), many states do not have enabling legislation.
• Limited to Certain Property Types: Usually applies only to real estate.
• May Not Be Suitable for Complex Situations: Can be problematic if beneficiaries are minors, have special needs, or if complex contingent beneficiaries are desired. Title insurance companies may also scrutinize these transfers more closely.

Limited Liability Companies (LLCs) or Family Partnerships

Placing out-of-state property into a business entity can be a sophisticated strategy.

How it Works: You transfer ownership of the real estate to an LLC or a family limited partnership (FLP). You then own an interest (shares or units) in that entity. Your estate plan dictates how your LLC/FLP interest (which is personal property) is distributed, not the real estate directly.

Pros:

• Potential Ancillary Probate Avoidance: Transferring membership interests is generally simpler than transferring real estate titles across states.
• Asset Protection: Can offer a shield from personal liability associated with the property, and vice versa.
• Centralized Management: Useful if multiple family members co-own property.

Cons: Requires initial setup costs, ongoing administrative burdens (like separate tax filings, annual reports), and adherence to corporate formalities. Complexity may not be warranted for a single, uncomplicated property.

A Separate Will for Each State (Generally Discouraged, but explain why)

Some might wonder about having a separate will for property in each state.

How it Works: The idea is to have a will specifically addressing the property located in a particular ancillary state.

Pros: Theoretically, it specifically directs the probate court in that state.

Cons: This approach is generally not recommended by estate planners. It carries a high risk of creating inconsistencies or conflicting provisions between the wills. It can lead to confusion, legal challenges, and more complex overall estate administration. Moreover, it still involves probate in each state.

Pour-Over Will (in conjunction with a trust)

A pour-over will is a safety net when using a revocable living trust. It directs that any assets owned in your individual name at death (that were not transferred to the trust during your lifetime or don’t pass by other means) should be “poured over” into your trust and distributed according to its terms. This helps catch any overlooked assets, though it means those assets will go through probate.

Steps to Take When You Own Out-of-State Property

Proactive measures are essential when your assets span multiple states.

Inventory Your Properties

Compile a detailed list of all real estate you own, including the exact location (address, county, state) and how the title is currently held for each.

Consult with an Estate Planning Attorney

This is a paramount step. Work with an attorney in your state of domicile who is experienced in multi-jurisdictional estate planning. If you own significant property in another state, such as holdings in La Mesa, California, your primary attorney may recommend collaborating with or referring you to counsel licensed in California to address specific local law nuances.

Ascertain State Laws

Through your attorney, gain a clear picture of the specific laws in each state where you own property. This includes probate procedures, forms of ownership recognized, potential state estate/inheritance taxes, and availability of tools like TOD deeds.

Review Deeds and Titles

Examine the current deeds for all your properties. How they are titled is a critical factor in how they will pass at your death. Your attorney may recommend re-titling properties as part of your overall strategy (e.g., into a trust).

Update Your Estate Plan Regularly

Life circumstances, family situations, your assets, and relevant laws all change over time. Review your estate plan every few years, or after major life events, to ensure it remains current and effective for all your property, wherever located.

Mistakes to Avoid

Several common missteps can complicate the administration of an estate with out-of-state property.

Ignoring the Problem

The most significant error is failing to address out-of-state property specifically in your estate plan. This almost guarantees ancillary probate and its associated burdens.

Assuming Your “Home” Will Covers Everything Seamlessly

While your will from your domicile state will likely be recognized, it will not, by itself, prevent ancillary probate for real estate located in another state that is titled in your individual name.

Relying Solely on Joint Tenancy without Apprehending Risks

Joint tenancy can be a useful tool, but it’s not a comprehensive solution and carries risks related to loss of control, creditor exposure, and doesn’t solve the issue for the last surviving owner.

Not Funding Your Trust

Creating a revocable living trust document is only half the battle. If you do not formally transfer title of your out-of-state property into the trust, the trust cannot control it, and it will likely still face probate.

Failing to Consider State-Specific Taxes

Overlooking potential state estate or inheritance taxes applicable to your out-of-state property can lead to unexpected financial liabilities for your estate or beneficiaries. This is especially relevant for properties in states like California, where property tax rules (like Proposition 13 and its reassessment triggers) can also have long-term implications for heirs managing assets in places like La Mesa, California.

Out-of-State Property? Protect Your Legacy (and Your Loved Ones)

Handling out-of-state property in your estate plan effectively is not just a matter of legal formality; it is about ensuring your assets are transferred smoothly, your beneficiaries are protected from unnecessary expense and delay, and your legacy is preserved as you intended. Whether your out-of-state portfolio includes a vacation home, investment properties, or land holdings in areas like La Mesa, California, or any other state, taking the time to implement a sound estate plan is a profound act of care for your loved ones. The experienced team at Garmo & Garmo can help you navigate these multi-jurisdictional challenges, crafting a tailored strategy that aligns with your unique circumstances and goals. We invite you to contact us for a consultation to discuss your specific needs.

5464 Grossmont Center Dr.
Ste. 300
La Mesa, CA 91942
Phone: 619-441-2500
Fax: 619-631-6444