It’s not uncommon for people to own real estate in multiple states. A common scenario is an individual or couple with a primary residence in Michigan and a “snowbird’ cottage in Florida or elsewhere in the South. Or there might be an income property, vacation condo or timeshare out-of-state, or even a home inherited from a parent years ago. Whatever the circumstances, owning real estate in more than one state requires special considerations when doing your estate planning.
Domicile and Estate Planning
You can have more than one residence, but you can only have one domicile. Your “domicile” is the legal term for your main place of residence, to which you intend to return when you are away. It’s even possible to spend most of your time in one state and be domiciled in another. In most cases, a person’s domicile is obvious, but sometimes, as when a person divides their time equally between homes in two state, a court must decide domicile.
Why is this important? The state where you are domiciled is where any state estate or income taxes will be paid, and where your estate will go through probate. Though having a domicile in one state won’t necessarily prevent your property in another state from being taxed there, where you are domiciled can have an impact on your overall tax bill. (Even if your estate is exempt from federal estate tax, it may still be subject to a state’s estate tax.) It is possible that if your domicile is unclear, two states could each claim that you are domiciled within their borders, and tax your estate.
The state where you are domiciled is where any state estate or income taxes will be paid, and where your estate will go through probate.
You can declare that you are domiciled in a particular state in your estate planning documents. This is helpful, but not dispositive, if the facts point in another direction. It’s important to support any declaration of domicile with actions that support it. In general, people have things like their primary physicians, attorneys, voter registration, employment and bank accounts where they are domiciled.
Avoiding Ancillary Probate
If you’re like most people, you know it’s generally desirable to avoid probate. One thing you may not have considered is that real property in another state is subject to probate in that state. Probate in a state other than the one where you are domiciled is known as “ancillary probate.” In addition to the expense and inconvenience that often accompanies the probate process, ancillary probate may take place in a state far from where your executor is located, forcing them to depend on an unknown local attorney.
Fortunately, ancillary probate can be easily avoided using many of the same estate planning tools that you would use to avoid probate in the state in which you’re domiciled. Many people get around ancillary probate by deeding their out-of-state real estate to a revocable living trust they have created. Other options include creating a family limited partnership (FLP) or a limited liability company (LLC) and making the real property an asset of those entities.
Tax Considerations Regarding Out-of-State Real Estate
Real estate may be your estate’s most valuable asset, so it is essential to consider the tax impact of having out-of-state real estate as part of your estate. Some of the devices that allow you to avoid ancillary probate can also help you to avoid estate or inheritance tax in the state where the property is located.
For example, if the property is located outside Michigan, but the property is owned by your LLC located in Michigan where you are domiciled, the other state may treat the entity as an intangible asset that is located where you are domiciled. In that case, the real property would not be subject to estate tax in the state where it is physically located. Some states will do this; others “look through” to the location of the real property itself and tax it there.
Other options for minimizing the tax impact of owning real property out of state include selling or gifting the property, possibly to a family member or a trust if there is interest in keeping the real estate in the family. Selling or gifting property may avoid estate tax in another state, but could cause problems for your own long term-care planning if not executed properly.
To learn more about how to protect yourself, your benefits, and your assets, request one of our free informational guides or contact an experienced Michigan estate planning attorney to discuss how to keep your out-of-state real estate from becoming a headache for you and your heirs.