Think You Have Just One Estate? You Could Be Wrong.

Your Estate is essentially what you leave behind when you pass on. And, all of us have many Estates. There is your Gross Estate, Taxable Estate and Probate Estate to name a few. But, what I’m talking about today is your Probate Estate. You may actually have more than one Probate Estate. If you are or were in the military the chances that you have two Probate Estates increases. Let’s start though with what your Probate Estate is.

Your Probate Estate includes those items that pass from you to your heirs via your will (or if you don’t have a will, then those that pass by state intestate law). Items specifically excluded from your Probate Estate include those items you own under certain types of Joint Ownership and those that pass by contract/rule of law (Life Insurance Proceeds, Retirement Account Balances and Transfer on Death Accounts, and Trusts). So, if you have one will (and you can only have one will) how can you have more than one Probate Estate? The “gotcha” is real estate. Real Estate probates in the state it is located, not where the decedent lives. For example, if you are a resident of Virginia and own property in Colorado in your name, when you pass away your Will will be probated in both Virginia and Colorado (the Colorado probate process will only include the Real Estate). And, if you are or were in the military there is a pretty good chance you own property (either by choice or by necessity) in more than one state. Why do you care?

Probate is expensive and takes time. By having more than one Probate Estate, you increase the time and expense involved with the probate process. There must be a better way, and there is.

Rather than holding out-of-state property in your name (or you and a spouse), consider allowing some other entity to own the Real Estate. This will get the Real Estate out of your Probate Estate. There are two primary options. Trusts and Companies.

Having a trust own the property allows you to continue to control the property and name someone else as the beneficiary/trustee when you pass away (or become incapacitated). This removes the Real Estate from your Probate Estate (but most likely not your taxable estate). There are many opinions on when this option is best, but in my mind Trusts work best with second homes or vacation properties.

Having a company (LLC) own the property also can remove the property from your Probate Estate (but not your Taxable Estate). In this case, you are not probating the Real Estate, but instead you are probating the company and therefore, you should not be required to conduct the second Probate process. LLC’s also provide a layer of liability protection and for this reason they work well with investment/rental properties.

If you have a mortgage on the property your mortgage holder will have to agree to allow the ownership of the property to be transferred to either a Trust or LLC.

I know many of you are thinking that you don’t need to worry about this because you own the property jointly with a spouse with rights of survivorship. That is true for the first death. But, on the second death you will confront this issue. It is something you still need to consider.

As with all things Estate Planning related this is not a “do it yourself” project. Make sure you seek competent legal advice prior to executing any documents relating to Estate Planning and prior to that, make sure you have a plan developed with the assistance of a competent Financial Planner.

About the author

Curt Sheldon, EA, MBA

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