I grew up on a Nebraska farm about 10 miles from the South Dakota border, as the crow flies. High school classmates lived in each state. Families farmed land that they owned, in each state. Whether it be for real estate or wives, we were not shy about going to South Dakota. And vice versa.
Nowadays I frequently consult with clients that own summer vacation properties up on the Missouri River. While a South Dakota landowning Nebraskan is the most common scenario that I see, I often have the opportunity to visit with families from places like Iowa, South Dakota, California, Virginia, or other states that own farm or ranch ground real estate here in Nebraska. All of these scenarios create a different set of factors that a real estate owner must consider.
While there are important considerations such as real estate taxes, insurance coverage, and other business items, this commentary is focused on asking, and answering, one simple question: what happens if I die while owning real estate in another state? In that context, here are 4 important things that you need to know about owning real estate in a different state from the one that you live.
1. If You Die a Resident of Nebraska, and Own Real Estate in Another state, You May be Signed up for Two Probates. If you die in Nebraska, it is quite possible that you will need a personal representative appointed in Nebraska to assist with the re-titling of assets to the proper beneficiaries. If you also happen to own land in South Dakota (or any other state for that matter), then your personal representative will have to open up another estate proceeding in South Dakota, to transfer that real estate through the probate courts. If you don’t think two probates are expensive, go ahead and sign-up to purchase two. This can become an even more serious issue if you die owning real estate in California or Florida, where legal fees can be substantially more than in the Midwest. This basic rule of thumb also holds true if you live out of state, and own real estate in Nebraska.
Probate is a judicial process used to re-title assets. A court’s probate jurisdiction in one state, cannot reach into a neighboring state to probate assets owned in that state. Therefore, two probates are required under the above scenario.
While there are exceptions and nuances to this reality, generally speaking, if your estate needs probated in the state where you live, it will likely need probated in the state where else you own real estate. This article presupposes that a person dies with probate assets, in each state (assets that will need re-titled at death).
2. A Revocable Living Trust Can Avoid Probate Out-of-State. A revocable living trust is a common estate planning tool that people use to transfer their assets to their children upon death. While there are several pluses, and a few minuses to using this as a tool, in the context of owning land out of state it can become invaluable. Analysis of a basic fact pattern will illustrate how this works.
Let’s say John Doe owns a 160 acres in Gregory County, South Dakota. Mr. Doe creates a Revocable Living Trust (which is an agreement with himself to create a trust), naming himself as the Trustee. He then transfers his real estate (via a deed) to John Doe, Trustee of the John Doe Revocable Living Trust. Years after this transfer, Mr. Doe dies as a Nebraska resident. While Mr. Doe’s departure is heartbreaking, his family can be comforted by the fact that his dutiful estate planning will have saved them thousands of dollars on a South Dakota probate. Instead, in an instant a successor trustee is named for the trust, who can then transfer the South Dakota real estate, as set forth in the trust instrument. No court action in South Dakota is required, at all. Had Mr. Doe not done this, then his family would have had to probate his estate in both Nebraska and South Dakota.
3. A Limited Liability Company Can Avoid Probate Out-of-State. Another tool in the arsenal of avoiding out-of-state probate for your out-of-state real estate is the use of a Limited Liability Company (LLC). When a person forms an LLC, they create an entirely different entity. By placing real estate into your LLC, you have essentially converted the nature of the asset that is owned. Ownership in an LLC is reflected through Unit Certificates (the titling document for your ownership interests in the LLC). Once real estate is transferred into your LLC, you no longer own the real estate as real estate–your LLC does. It becomes a part of the assets held inside your LLC. Notably, your ownership certificates are not “real property,” but are instead classified as “personal property.” As such, personal property that you own, at death, is subject to the probate jurisdiction of the state that you live in at death.
Sticking with the above hypothetical, say Mr. Doe transfers his South Dakota real estate into “Doe Properties, LLC.” Now, if he dies, his family will not have to probate in South Dakota. Instead, his family has a personal property interest in unit certificates, which are subject to probate jurisdiction in Nebraska. However, this can become dicey, given the potential taxability of these unit certificates in Nebraska. Keep reading.
Other business factors may also weigh in on the decision. From helping reduce self-employment taxes, to unifying your multi-state business operation, an LLC may be just what you need.
4. Consider Death Taxes in the State Where You Live and the State Where Your Land is. If you are living in Nebraska, your estate will be subjected to Nebraska inheritance taxes. This tax will not apply to real estate owned out of state. Depending on the value of the out-of-state real estate and tax rate of the beneficiary (which is determined based upon familial status of the beneficiary with the deceased), it may be financial suicide to put your land into an LLC. So in Mr. Doe’s case, if that 160 acre tract is valued at $1,000,000 (due to improvements and such), and he is giving it to his girlfriend (who he is unrelated to), she is going to pay $180,000 in tax on this bequest (18% for Class III heirs–those heirs that a person is not related to). In that situation, Mr. Doe should consider a trust. However, if the heir is a child (Class I heir–with a 1% tax rate), he may consider just leaving it in an LLC because it works better for him, and just plan on paying the tax.
But what if Mr. Doe lives in South Dakota, and owns a $1,000,000 tract in Nebraska? Then he should sprint to forming an LLC and convert his Nebraska real estate to a personal property item (general intangible), so it can then be subjected to the probate jurisdiction of South Dakota.
There is no one-size-fits-all approach to simplifying your multi-state estate. It is not always as simple as outlined above. There are a number of other considerations, any time a person is doing estate planning. It is important that the estate planning aspects jive with the business planning components, as well as the overall distribution plan. Moreover, perhaps there are serious federal estate tax gifting considerations as well–which may dictate the LLC. In the end, as long as a person has a general awareness about this problem–avoiding probate in multiple jurisdictions–that will be sufficient to at least start the conversation with your estate planning attorney.
We are excited about getting to help people make the right decision for their family. We make doing business with us convenient. Get started right now by visiting us online at /estate‑planning/ or by calling 402.925.2268.