Owning Real Estate in Multiple JurisdictionsFebruary 2013
This Insights discusses the unique estate tax and insurance implications of owning real estate in multiple jurisdictions.
Many individuals and families own more than one property-usually their primary home and a secondary residence, most commonly a vacation home. Often, this secondary residence is located outside their state of primary residence. It’s important to understand the unique estate tax, probate and insurance implications associated with owning real estate in multiple jurisdictions, and to consider planning strategies specifically designed for these real estate owners.
THE IMPACT ON YOUR ESTATE TAXES
If you own real estate outside your home state, your secondary residence may be subject to estate and inheritance taxes in the state where that residence is located. For example, if you own a secondary residence in New Jersey, Pennsylvania, Connecticut, Massachusetts or New York, that real property may trigger the imposition of estate and/or inheritance tax in that state, even if you do not reside there.
In addition, in many states the term “real property” includes ownership of a condominium (but generally not the shares of a cooperative apartment) and gas and oil interests. It’s also important to understand that tangible personal property located in your secondary residence, such as fine art and antiques, may also be subject to estate and/or inheritance tax in that state.
Certain Ownership Structures Can Help
If you own real or tangible personal property in a state other than your home state, it’s important to consult with a local trusts and estates attorney to identify strategies to reduce or avoid federal or state estate taxes. Of course, it is preferable to have this conversation prior to acquiring title.
For example, transferring title of your property to a limited liability corporation or a family limited partnership may avoid the imposition of estate taxes. Or, you may consider transferring title of your property either outright to a beneficiary or into a qualified personal residence trust (QPRT). Of course, it’s important to discuss with your lawyer the gift tax consequences any title transfers may have.
THE IMPACT ON ESTATE TAXES FOR NON-RESIDENT NON-CITIZENS
Significant estate tax consequences arise if a non-U.S. resident non-U.S. citizen owns real property (or certain types of tangible personal property) in the U.S. In 2013, each U.S. resident is allowed to transfer up to $5.25 million free of estate and gift tax during their lifetime. However, if an individual is a non-U.S. resident non-U.S. citizen, the amount that can be sheltered from estate tax is only $60,000. There are estate planning techniques available, and your trusts and estates attorney should be a valuable resource in developing those strategies.
THE IMPACT ON YOUR ESTATE’S PROBATE
If you own property outside your home state and that property is owned in your individual name, it will be necessary for the executor of your estate to commence an ancillary probate proceeding (a second probate proceeding in the state where the property is located) in order to pass title to the beneficiaries named in your will. If you die without a will, an intestacy proceeding may be required to pass title to your heirs-at-law.
One common strategy to avoid ancillary probate is to transfer title of this property to the trustee of a revocable trust. Although such a transfer will not avoid imposition of estate taxes, it will avoid ancillary court proceedings and facilitate a more timely transfer of the property to your beneficiaries.
THE IMPACT ON TRANSFERRING THE TITLE
You may also want to check with a local attorney in the state where the property is located to secure a power of attorney in that state. Even if you have a power of attorney in your home state, it is very likely that you will need one in each state where you own real estate to transfer title.
THE IMPACT ON YOUR INSURANCE COVERAGE
It’s important to ensure adequate homeowner’s insurance is in place to cover any loss at your secondary residence. If the secondary residence is a vacation home, consider advising your insurance carrier if the home will be vacant or unoccupied for long periods of time. Otherwise, if a loss occurs when you are not at the residence and you failed to notify the carrier that the property would be vacant or unoccupied, the carrier may deny liability.
CONSULT YOUR ATTORNEY
Individuals who own real estate in multiple jurisdictions should consider consulting a trusts and estates attorney in each state where the property is located. Fiduciary Trust stands ready to work with you and your attorney to implement an appropriate estate planning solution.
This communication is intended to provide general information. The information and opinions stated herein are as of February 2013, unless otherwise indicated, and do not represent a complete analysis of every material fact. We undertake no obligation to update this information. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual tax or investment advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. IRS Circular 230 Notice: Pursuant to relevant U.S. Treasury regulations, we inform you that any tax advice contained in this communication 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 another party any transaction or matter addressed herein. You should seek advice based on your particular circumstances from your tax advisor.
ABOUT THE AUTHOR
Michael M. Mariani is responsible for the Trust and Estate Administration departments at Fiduciary Trust. He is also an Adjunct Professor at St. John's University School of Law and has lectured and written articles on numerous trusts and estates topics.
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