Property in Two or More States Can Complicate Estate Planning

Owning property in multiple states is more common than you might think. Many people who have a primary residence in Minnesota have an interest in real estate elsewhere. That might be a rental property, a shared family cabin, a “snowbird” condo in a warmer state, or even a timeshare. If you don’t spend much time at your out-of-state property, you may not give it a lot of thought. But whether you spend half the year at a residence out of state, or only visit for a week once every couple of years, you need to consider it when estate planning.

Here’s why. As a general rule, the estate of a deceased person (decedent) goes through probate in the state and county where the person last resided. Your probate estate includes all real and personal property owned in your sole name: any real estate you own, your bank accounts, your investments, your furniture, artwork, clothing, cars, and so on.

If the only real estate you own is your residence, that’s not a problem. By definition, your residence is in the state where you reside. But owning real estate in another state creates a wrinkle, because unlike personal property, real estate must go through probate in the state in which it is located. That could mean two separate probate processes, delay in the distribution of your assets, and additional expense to your heirs or beneficiaries.

Obviously, that’s something most people would prefer to avoid. Fortunately, it’s possible to avoid a second probate process (ancillary probate) for real estate located in another state. The key is to deal with the issue up front in the estate planning process.

Estate Planning for Property in Multiple States

There are multiple options to avoid the ancillary probate process for real estate that you own in another state. These options allow the property to pass outside of probate. However, some of them may also have unintended consequences, so it is important to discuss your estate planning goals with your attorney to ensure that solving one problem doesn’t create another.

One possibility for avoiding ancillary probate is creating a joint tenancy with right of survivorship. This is simple to do: you just execute a deed from yourself as sole owner of the property to yourself and another person or people as joint owners with right of survivorship. When one owner dies, the other(s) automatically take the property, with no probate or court action necessary.

Joint tenancy may be an acceptable option if your intended joint tenant is your spouse. However, if the real estate was your separate (non-marital) property before you married, making your spouse a joint tenant means that the real estate would be considered marital property, subject to division in a divorce. Likewise, if you make your adult child a joint tenant, they don’t just inherit the property when you die; they have a present interest in it. That means their creditors (including a divorcing spouse) could come after the property, perhaps forcing a sale. In short, the ease of creating a joint tenancy probably isn’t worth the potential risk.

Another option in many states is a “transfer on death deed,” commonly referred to as a TODD. This document allows you to transfer real property to another person outside of probate upon your death. After executing the deed, you simply record it with the local property records office or other appropriate authority. A transfer on death deed eliminates some of the problems with a joint tenancy, since the other party has no interest in the property until your death. However, only about half of the states in the U.S. have a transfer on death mechanism for real property, so you’re out of luck if your real estate is not located in one of those states.

There are other potential pitfalls. If your beneficiary is a minor, a court may need to appoint a conservator to manage the minor’s assets until they become a legal adult. And if your beneficiary wants to sell the property soon after it becomes theirs, they may have difficulty doing so; some title companies are unwilling to insure that title is clear until as much as three years after the transfer.

Joint tenancy and TODDs may have utility, but there is usually a better option for avoiding ancillary probate.

Using a Living Trust to Avoid Ancillary Probate

Most attorneys agree that holding your real property in a living trust is the best way to avoid ancillary probate. Property that is held in a trust does not go through probate, so in addition to avoiding ancillary probate, you can avoid probate in your home state as well. A living trust can also hold personal property.

Another advantage of a living trust is that you can act as both trustee and beneficiary of a living trust you create during your lifetime. You can use, enjoy, and transfer property in the trust just as if it were still in your sole name. The difference is that upon your death, a trustee you have chosen takes over management of the trust and distributes income and assets as you have dictated in the trust document. No conservator needs to be appointed for a minor beneficiary. If you have concerns about protecting trust assets from a beneficiary’s potential creditors, the trust can be drafted to offer protection.

The important thing is to make sure that your estate planning attorney is aware that you have an interest in property in another state, and that she understands your planning goals. The terms of a trust will depend on your unique needs and circumstances.

To learn more about estate planning in Minnesota when you have real property outside the state, contact Mundahl Law at 763-575-7930 to schedule a consultation.