With the pandemic legitimizing remote work solutions, more and more people are purchasing and owning real property in multiple states. During life, this situation typically does not cause any issue, however, upon death, this may lead to more administrative work for your executor/personal representative as most jurisdictions require an ancillary probate be initiated to transfer a decedent’s real property interest to another person. However, there are other avenues to minimize the need for an ancillary probate if proper planning is done.
What is Ancillary Probate?
An ancillary probate is usually a secondary probate proceeding started in another jurisdiction after an initial probate or similar process was started in the jurisdiction where the decedent was a resident at death. Due to the ancillary nature of these probates, many states have expedited or abbreviated probate procedures based on the total value of the estate’s property within the jurisdiction. However, even with an expedited or abbreviated probate, the legal fees involved can be several thousand dollars exclusive of transfer costs as most people rely on a local law firm within the ancillary probate jurisdiction to begin the ancillary probate process.
There are several options that can provide transfer mechanisms that lessen or may obviate the need for an ancillary probate. The most common are a transfer on death or similar type of deed, a revocable trust, and limited liability corporation.
Assuming a person knows who they want their real estate to transfer to upon their death, different jurisdictions may allow deed transfer mechanisms that operate upon an owner’s death. For example, Washington authorizes a transfer on death deed to be filed with the county recorder (RCW 64.80, et seq.), which acts to transfer ownership to another person at the moment of death. As the decedent’s ownership does not continue after death, an ancillary probate in Washington would typically not be required for such property. Other jurisdictions that may not have a similar statutory instrument, may instead allow a deed to be filed with all owners as joint tenants with right of survivorship (JTWROS). It is important to note that a transfer on death deed and JTWROS deed are different instruments. For example, a JTWROS deed creates a present and equal ownership interest for each joint owner, while a transfer on death deed creates a contingent future real property interest that does not come into existence until the current owner dies. Furthermore, a transfer on death deed can be revoked by the grantor during life, while a properly executed JTWROS deed will need each joint owner to agree and act for any ownership change. Also, each jurisdiction that recognizes a JTWROS deed may have different rules regarding the formalities to transfer ownership from the decedent to each of the survivors, so please consult with a local attorney to be sure; however, the process would likely not be that of an ancillary probate.
Next, if you have a revocable trust (sometimes called a “living trust”), ancillary probate proceedings could be avoided if the trust holds title to the out of state real property. Generally, this involves preparing a deed transferring the property to the trust as the legal owner and recording the deed in the county where the property is located. Property held in a revocable trust generally does not have to go through probate. However, before transferring any real estate to a revocable trust, talk to your legal advisor to ensure that doing so will not have negative tax or estate planning implications. For example, will transferring a residence to a trust affect your eligibility for homestead exemptions from property taxes or other tax credits/deductions? Will the transfer affect any mortgages on the property? Will the transfer be subject to any real property transfer taxes? It is also important to consider whether transferring title to property will affect the extent to which it is shielded from the claims of creditors.
Finally, if the property may be used in a for-profit capacity, such as an Airbnb or other type of rental, a Limited Liability Company (LLC) or other business entity may be a better option if liability is a concern. Similar to a revocable trust’s ownership, real property owned by an LLC would typically escape ancillary probate, as the LLC continues to own the property after a shareholder’s death. Of particular note, LLC ownership shares are still subject to Washington probate court jurisdiction and therefore transferable to your beneficiaries through a Washington probate, even if the LLC’s sole asset is your out of state property. Also, in addition to the previous estate planning or negative tax implications of a trust, an LLC may also have additional administrative requirements for separate tax filings, corporate formalities, etc. Please consult with an attorney who understands your particular situation and is knowledgeable about corporate formation and liability to make sure this is the best option for you.
While having an out of state property can enrich your life and provide an additional revenue stream, it may also require an ancillary probate if a transfer mechanism has not already been planned for and put into effect. Some options for avoiding an unnecessary ancillary probate are transfer deeds that operate upon an owner’s death, having a revocable trust own the property, or having an LLC own the property. However, due to the complexity of these options, please consult with an attorney to determine the best option for your unique situation.
If you would like to discuss how this article may apply to your estate plan, please consider speaking with one of our firm’s knowledgeable and experienced Estate Planning Attorneys.