What should you do with that vacation home in Florida, your little cabin in the woods of Michigan, your timeshare at the Las Vegas Casino, or your sunbird condo in Arizona when you are planning your estate or writing your will?
With the decrease in the need for tax planning trusts, and the relatively streamlined probate process in Colorado, many clients are choosing not to use a trust when they visit us about their estate planning needs. One pesky issue usually remains: their out-of-state second home.
If they do not attend to it prior to their death, ancillary probate will be required. “Ancillary probate” simply means probate in the state where their second property was, but where they were not domiciled. It is “ancillary” to the “domiciliary” probate.
There may be good reasons to avoid probate in other states. Often, even if you do not require your personal representative (sometimes called an executor) to post a bond in Colorado, in order for that person to administer the estate where the second property is, the personal representative will have to post a bond. Also, not all states are as “pro se friendly” as Colorado, meaning another state may not be as open to someone appearing in court on a matter without an attorney. Some states require that any probate go through an attorney, even for issues as “simple” as selling your second home or re-titling it in the names of your heirs.
Some clients ask us, “Why can’t I just give the property to my kids now?” The short answer is there are probably considerable gift tax consequences, in addition to the property losing the step-up in basis for capital gains tax purposes. Also, many clients want at least some strings attached to the transfer, especially if they have minor children, they are unmarried, or they have re-married and have children from a prior relationship.
- First, talk to your family. Do the kids want to keep that home after your death (or the death of you and your spouse if you own it jointly)? Can they afford the property taxes and maintenance? Do the kids and their spouses get along well enough to come to an agreement on when to use it and how to pay for it? Would it be better to simply sell the home upon your death and let the kids split the money?
- Next, ask around and talk to your neighbors and property managers for recommendations for real estate and estate planning lawyers in the state where the property is located. If you can’t find a good recommendation from them, look at the State or Local bar associations. You will need to have the advice of an attorney licensed in that state. Questions you’re going to want to ask: Is there a state estate tax? Is this a community property state and how will this affect my plans? What are the restrictions on transfer (such as homeowner’s or condo-owners associations, or found in the timeshare contract)? What are the capital gains tax considerations? What are the state income tax considerations? You may also want to check with a benefits attorney, since transfers of real property can raise issues related to qualifications for Medicaid, and other governmental benefits.
- Do your own research. Look at your property. Make sure no one is storing anything on your property without your express, written permission and double check that there are no outstanding debts or liens on the property. No one wants to inherit adverse possession issues or liens from their well-meaning parents who simply forgot to pay the wood-floor installer. It is inexpensive to pull an “Ownership and Encumbrance” report on your property, and often your title company will provide those to you for a minimal fee. Double check your water rights or mineral rights and revisit those when you talk to the lawyer in that state. It would be a shame to transfer the land but not also transfer the mineral interests and then have to have your relatives go through ancillary probate if you meant for them to avoid it. If this is farming or ranching property, you should also consider the tax consequences of the transfer. If anyone leases this property from you, either to graze their cattle or for short-term stays such as Airbnb, you need to carefully consider how to approach re-negotiating that or at least advising your personal representative or trustee of their presence and updated contact information.
- Watch out if you have a mortgage. If you re-title the property, it may very well accelerate the loan. Check your closing documents on your mortgage for this type information (as will a lot of other relevant information). Most financial institutions include a clause requiring notification of a change of ownership or of the death of the owner/occupant, and if the institution is not the same one that you use for your primary banking, this can get forgotten and sometimes results in a nasty surprise for the personal representative or the adult children who are trying to sort things out. It is a good idea to put the copy of the mortgage paperwork with your estate documents. You could also include a note on whether your mortgage is paid by an automatic debit from an account because sometimes bank freeze accounts while negotiating deceased processing and that can also be problematic.
- Talk to the title insurance company. You don’t want to give the property to the kids only to find out they will have trouble selling it later because the title is not insurable.
- Now decide the best option for you.
- Is the probate process in that state inexpensive and easy to navigate? You might want to use it.
- If you decide not to use the probate process and you don’t want major restrictions on what your heirs will do with the property, you can use a Beneficiary Deed a.k.a. Transfer-On-Death Deed. There is also an option of giving your spouse a life estate in the property (he or she has full use of it while living, and then it passes to your heirs). The owner records the beneficiary deed with the clerk and recorder, and then upon the owner’s death, the personal representative records a certified death certificate and affidavit with the clerk and recorder. There needs to be enough assets in the estate to cover the liabilities of the estate, otherwise non-probate assets, including those that pass by beneficiary deed, can be used to satisfy the creditors of the estate.
- If you want to place restrictions on what your heirs do with the property, if it is farming or ranching property, or if the tax considerations merit it, then you might consider creating a Trust which could be funded prior to your death with that property and that would be funded upon your death with that property. Careful record keeping will be required of your trustee.
- Finally, again if there are mineral, water, farming or ranching interests, or if you have another reason for wanting the liability protection, you could create a business and transfer the title to that company. You would need to determine whether it was best for a Colorado business to hold the property or a business formed in that or another state. Careful record keeping will be required to comport with the statutes governing your choice of entity (such as LLC, S-Corp, C-Corp, etc.).
If you would like to discuss how David S. Rolfe, LLC, can assist you with your estate planning needs please contact us.
- Jennifer Spitz, J., 10 Estate Planning Considerations for Out-of-State Property, 45 Colo. Law., No. 8, 53 (August, 2016).
- Julie A. Lemke, J. Practical Considerations in the Use of Colorado Beneficiary Deeds, 44 Colo. Law., No. 1, 41 (January, 2015).
IRS Circular 230 disclosure: A U.S. Treasury regulation (31 C.F.R. Part 10, § 10.35) requires us to inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to any party, who is not the original and intended recipient of this communication, any transaction or matter addressed herein.