Dealing with out-of-state property issues in estate plans

It's vital that family members participate in estate planning decisions involving out-of-state property. It's vital that family members participate in estate planning decisions involving out-of-state property.

It is very common for wealthy people to own property in several different states — and for one of those states to be Florida. That’s why all estate planners and their clients should be aware of a late July ruling that came out of Florida, where an appellate court affirmed that a Florida probate court does not have jurisdiction over real property in another state.

In the current case, a person domiciled in Florida but also owning land in Georgia passed away, and the decedent’s estate went through probate. At first, the Florida probate court directed the estate’s representative in Florida to distribute the decedent’s Georgia real estate, but one of the beneficiaries appealed the order, arguing that the Florida probate court lacked jurisdiction to dispose of the Georgia real estate. 

An appellate court in Florida agreed with the beneficiary, ruling that a Florida court does not have jurisdiction over real property located outside of Florida. 

“When a testator executes a will devising lands in two or more states,” the court ruled, “the courts in each state construe it as to the lands located therein as if devised by separate wills.” The personal representative was required to open an ancillary action in Georgia. 

Certainly it’s not an ideal situation to require a personal representative to open multiple cases to distribute an estate. On the other hand, it would be much more time consuming, expensive, and irritating for one set of heirs to think the estate was settled, only to have the orders reversed on appeal.

That’s only one of the concerns that wealthy clients who own property in multiple states need to be aware of. This very common situation can give rise to several problems that the clients may not foresee. Some things to keep in mind:

Multiple probates

As the Florida example indicates, having property in multiple states can lead to multiple probate proceedings. The most foolproof way of avoiding this problem of having to probate in two states can be eliminated by simply avoiding probate.

One simple option: Keep the title to the properties in two or more names with the right of survivorship. That will keep the second property from having to pass through probate. Consider changing the estate plan as soon as the first spouse dies, though, or if marital problems may lead to divorce or disinheritance.

Be wary of changing domiciles

Many people who purchase property in another state consider changing their domicile to whichever state offers the best tax benefits. A client can have as many residences as he or she likes, but there can be only one domicile, defined as the place the client intends to make a permanent home.

The IRS as well as state taxing authorities isn’t inclined to let people choose which residence is their domicile. It’s determined by where the client is usually physically located, as evidenced by such factors as:

  • voter and automobile registration, membership in clubs and religious groups,

  • the address on bank and credit card statements, and

  • where the client spends most of his or her time. 

  • If it’s worth the client’s while to establish a new domicile, he or she needs to be painstakingly careful about it.

State inheritance and estate taxes

Property owned by a client who is domiciled in a state without estate taxes can still be subject to estate tax. Seven states also impose a separate inheritance tax, which can also come into play. Make sure your clients are aware of the tax situation in all the states in which they own property.

Plan ahead

Issues around out-of-state property make it vitally important for family members to be involved in any estate planning decisions. Will they want to use the property themselves, or are they likely to sell it after the client passes on?

Those aren’t always easy questions to ask, but if the heirs don’t want to keep the property, it could be much easier to sell it before the client’s death, or to arrange for its sale in the estate plan. If it’s a property the client’s family wants to keep, make sure the estate plan addresses that in a way to minimize taxes and avoid probate. 

See also these articles by Tom Nawrocki:

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