Commonly called “probate,” the laws that dictate the handling of a person’s assets after their death usually depend on which state they live in.

However, when it comes to real property, the laws regarding its administration are determined by the state in which the property is located.

This distinction can result in unexpected complications when managing assets after death. Fortunately, there are strategies available in the estate planning toolkit to tackle this matter and ensure a smoother administration process for your beneficiaries.

To clarify the issue, let’s consider a scenario where you live in Washington state and own a condo in Arizona. In this situation, it is probable that your estate would be subject to probate proceedings in both Washington and Arizona.

The idea of undergoing the probate process in a single state often evokes feelings of disappointment, frustration or fear. Now, envision the additional challenge of having to navigate two or more probates across multiple states. This is the issue at hand.

Additional complexity

The complexity is only due to out-of-state real property ownership. This category of property includes land, condos, houses and any other ownership rights in land (for example, oil and mineral rights and certain timeshares.).

Without using one of the solution techniques below, dealing with out-of-state property can lead to added expense and time for the administration after death.

Each of the 50 states is different in terms of added expense and time, but just to ballpark the order of magnitude, let’s assume an additional probate might cost $5,000 and add six months of administration after death.

Keep in mind, this applies even to spouses upon the death of the first spouse to pass. Further, owning real property in multiple states increases the number of probates required. 

Strategies to help

What are the techniques to address real property ownership in another state? While there may be other potential solutions, here are the five primary ways individuals can address out-of-state real property in their estate plan.

• Keep it simple and do nothing special. A basic will is effective in all 50 states. A couple planning for out-of-state real property might choose this route and not do any specific planning for strategic reasons. For example, they might plan to sell or gift the property soon, removing the need to do any planning specific to that asset. This plan has some risk: the additional cost and time in the event one or both pass before divesting of the property.
• Living trust for all assets. The estate plan governing all assets could be switched from a will to a living trust. Though a living trust has limited benefits for most folks in Washington, one specific area where it outshines a will is with out-of-state real property because it allows for the packaging of all property (in and out of the state) into the trust for one singular administration under the laws of the state of residency.
• Living trust only for out-of-state real property. Sometimes the out-of-state property shouldn’t wag the tail of the dog. That is, perhaps the ownership of a condo in Arizona shouldn’t drive the rest of the estate plan. Instead, you could choose to solve the Arizona condo issue by putting just that Arizona condo into its own trust, allowing the rest of your estate plan to utilize a simpler will.
• Limited liability company. An LLC is a great solution technique when dealing with income-producing or business property located out of the state. Not only does it provide a level of liability protection, but it transforms ownership from direct real property ownership to the ownership of an LLC itself. The result is that the LLC owner no longer owns out-of-state real property.
• Transfer on death deed. A transfer on death deed is a deed that can be recorded during life that serves to transfer ownership to another person only upon death. Because each state has its own laws, it’s important to understand whether the state where the property is located allows Transfer on Death Deeds. As of this writing, there are 19 states that do.

Ultimately, the solution technique employed is driven by several factors.

First, how is the property used? Is it a business (income-producing) property like a farm or rental property?

Second, what are your personal plans for the property? Do you plan to keep the property long term or is it an asset you plan to gift or sell in the near future?

Third, what is the rest of the estate plan and how can the out-of-state property fit into that plan?

To determine which solution works best for you and your situation, please consult your attorney.

Beau Ruff, a licensed attorney and certified financial planner, is the director of planning at Cornerstone Wealth Strategies, a full-service independent investment management and financial planning firm in Kennewick.