If you are like most rich people, then you probably have one or more houses in multiple states. It is possible you normally reside in New York but own a beach house in Miami where you go to enjoy the winter. Or possibly you have inherited a land or other real property from your parents in one state whereas you live in an entirely different state. These scenarios all have a critical impact in your overall estate plan, and it is not a positive one. It then becomes highly important that you take conscious steps to mitigate problems associated with owning property in multiple states through proper estate planning.
Understanding domiciliation
In so many states, your recognized permanent address is taken into account. This permanent address is known as your domicile, and is the property where you are expected to come back to no matter where you are currently. Some people, due to business, sport or vacation can spend months up to years in a foreign country but may also have a home in their own state. Regardless of how much time you spend in your domicile, it will still be legally regarded as your domicile. Most times, this address is what appears in your voter’s card, passport, bank accounts, etc.
What is the reason for this, you ask? Simply for tax purposes! The state in which you are domiciled has a great influence on your overall tax liabilities. It is this state that your income and estate taxes would go to when you pass away, and where probate will also be conducted.
But that doesn’t exactly mean you won’t have to pay those taxes in other states in which you own real property. In fact, it will still be taxed if that state imposes state estate tax on estates owned therein. However, it is possible that your current state of residence does not impose these taxes but your domiciliary state does.
Also, it is worthy of note that sometimes your domicile may not be so clear-cut and then each state would entitle itself to a piece of your property, claiming to be your legal domicile. Therefore, you should declare in your estate plan that so-named state is your domicile. While doing this, ensure that your documents and ID cards also say the same thing.
Ancillary Probate
A major issue people who own property in multiple states face is ancillary probate. First of all, probate is the legal procedure by which your estate is administered and disbursed after your death. It is a rather complicated, expensive and time-consuming legal process.
It is officiated in the probate court in the county where you lived and/or owned real property. What this immediately tells you is that probate will take place in each individual state where you own property. Probate in one state is enough headache on its own; imagine how much expenses and stress your family would have to handle when you pass away if you have property in up to 3 states. They would be traveling here and there!
But luckily, this unnecessary stress could be avoided simply by adopting the same estate planning strategies used to avoid probate in one state. You can get an estate planning attorney (highly recommend) to help you create a living trust and naming it as the owner of all your real property.
Another way to avoid probate for property in multiple states is by establishing a limited liability company or family limited partnership. After doing this, you then have to name your real estate as property of the unit. An estate planning attorney can help you prepare and execute this.
Tax liabilities for real property in multiple states
Another major consideration as regards estate planning for property owned in multiple states is tax. Some states impose estate tax and income tax on estates in addition to the general federal estate tax. Imagine having real property in two states of which they are both tax liable. It means a considerable amount would be going to the government rather than your loved ones. But the good news is you can use the same estate planning devices to avoid tax as you would if it were a single state. You could simply gift the property to a loved one before you die, sell it or include it in your trust.
However, you should be very careful when dealing with gifting as it has a negative impact on your long-term care plans. If you plan to include the estate which you own in another state in your limited liability company, you also have to note that some states will still tax it regardless.
Get help from an estate planning attorney
To be on the safe side, we advise you speak with an estate planning attorney near you. He would be knowledgeable in the estate laws surrounding your state and will educate you on the consequences and advantages of each estate planning strategy you take.
