Planning for Out-Of-State Real Estate on Death

Most people’s estates are probated in the state (and county) where the decedent resided. For decedent’s who owned real estate in a state where the decedent does not reside, the situation can be more involved. Typically, such out-of-state holdings will result in probating of the decedent’s will in the state where the decedent resided and raising an “ancillary estate” in the state or states where the decedent held real estate but did not reside.

For Pennsylvania residents this can create a patchwork of requirements. For example, if a Pennsylvania resident died owning a home in Montgomery County, Pennsylvania and a vacation home in Maine, his executor would probate his will in Pennsylvania and then also, using a certified copy of the Pennsylvania probate proceedings, probate the will in Maine as an ancillary estate. The executor would need to do this in order to sell the property or even to convey the property to a beneficiary under the will. Likewise, there would likely be a Pennsylvania Inheritance Tax and a Maine Estate Tax. Both of these returns would have to be filed and any tax paid in order to pass “clear title” to the property.

There are a couple of variations on this form that we see. In many cases, the out-of-state property the decedent has an interest in is jointly owned with right of survivorship or by the entireties ( a special type of joint ownership between husband and wife). In such a case there would be no need to probate an “ancillary estate”, but in most states there would need to be filed either an inheritance or estate tax return. In other cases, a person with out-of-state real estate may die without a will. In that case the intestacy laws of the state where the property is located applies to how the property is conveyed and/or how the sales or rental proceeds are split. Since intestacy laws vary from state to state, this can lead to surprises. For example, in Pennsylvania the intestacy laws give $30,000.00 plus half of the balance of the estate to a wife, when all children of the decedent are also children of the wife. In selling or conveying a Pennsylvania property owned by the decedent this “split” would have to be taken into account. However, if that same decedent also owned, in his own name, a vacation home in New Jersey, it would outright and entirely be conveyed to his wife, under New Jersey law. It’s likely, given the bulk of our experience, that New Jersey’s treatment of the distribution would be what the decedent wanted, but without a will that would never be known.

Proceeds of out-of-state real estate may be subject to certain withholding requirements if the property is sold. For example, in New York, a non-resident estate that sells real estate may have to pay (on a withheld basis) capital gain at the highest possible capital gain rate, 8.8%. However, certain exemptions may be available based on how, or how often, the non-resident decedent used the property during his life.

  • What to make of this:
    Whether you own real estate in one state or fifty, we strongly advise that you have a will so that your wishes are known and the distribution of the property is not at the mercy of whatever state law happens to apply;
  • If you have out-of-state real estate, you can avoid ancillary probate in that state by putting the property into a trust or other legal entity. Of these entities a revocable trust is the most flexible (it can be revoked or modified at will) and the most efficient (it requires no additional tax filings either at creation or annually at income tax time);
  • If an estate is selling real estate in another state make sure the estate attorney is given plenty of time to investigate the tax consequences and/or retain and communicate with local counsel to make sure things are done smoothly and in a tax efficient manner;
  • and If you own real estate in another state, make sure your estate planner knows about it and that he does not simply assume that there is nothing to be done to make the estate more stream-lined.

— Rod Fluck

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