Insights for Your Journey

If you live here in our home state of Washington, a winter getaway to your sunny California vacation home can be quite the relief! But whether your property is in California or another state, you might leave an unintended legal mess or estate tax bill to the next generation when you pass it on. So how should you address this in your financial and estate plan? Do you need a trust? How does it all work?

We hear these questions from many of our clients, so we collaborated with Meghan DeSpain, a Seattle-based estate planning attorney with experience in both Washington and California, to provide some guidance on why this planning is so important, the primary strategies to consider, and how you might apply these principles.

For most, the worries about planning around out-of-state property fall into two groups:

  1. We don’t want to leave a mess for our kids, often an effort to avoid legal difficulty and pass assets smoothly.
  2. We don’t want to leave an estate tax bill for our kids, usually an effort to reduce estate taxes.

Let’s look at each goal.

 

Goal 1 – We don’t want to leave a mess. We want to pass property smoothly.

When you pass away (with or without a will), your estate goes through probate, a court-supervised process to appoint a personal representative, pay your creditors, and distribute your remaining assets to your beneficiaries. But, depending on your state, probate can be long, expensive, and public.

In Washington, probate averages $5,000-$15,000 in cost and 6-12 months in length. But a state like California requires multiple court hearings which can linger on for a year or more, and charges high fees based on estate size, which can exceed $120,000 on a $5 million estate, for example. As your estate grows, the probate fees grow along with it.

Probate court proceedings are also a matter of public record, so details of your assets and beneficiaries will be open to anyone. So, what can you do to pass assets smoothly and avoid a mess with out-of-state property?

 
Three strategies to consider (most choose number 3)

There are a few ways to pass out of state property smoothly, but most people find a trust to be most effective. Here’s why.

  1. Own your property as a joint tenancy. In a joint tenancy, you co-own the property with another person, usually a spouse. When spouse one dies, spouse two fully owns the property without probate, but the property will still go through probate when spouse two dies, leaving the kids and grandkids to bear these challenges.
  2. Set up a Transfer on Death (TOD) for your property. You keep full ownership during your life and the TOD passes the property to a beneficiary without going through probate. While this is simple, inexpensive, and effective when you have a single beneficiary, you still pass on liability risk. If you have multiple beneficiaries, you may create unwanted co-ownership.
  3. Move the property into a trust. A Trust is the most common way to address the probate issue more fully. A Trust is a fiduciary relationship that you legally establish between three parties:
  • Grantor, who gives the assets and creates trust
  • Trustee, who holds and manages assets for the benefit of the beneficiary
  • Beneficiary, who has the present or future right to use the trust assets

Once created, you legally assign ownership of your out-of-state property to the Trust, which is then governed by the set of legal instructions you laid out that details what happens with the property during your life and who receives the property when you pass away.

Why does this solution solve the problem more comprehensively?

  • A Trust can create a seamless transition from you to your beneficiaries because the property is already owned by the trust…there is no ownership change when you pass away.
  • A Trust can protect your privacy, as it is not a public record like probate.
  • A Trust can protect beneficiaries from certain kinds of liability.
  • A Trust’s trustee can act for the benefit of beneficiaries without waiting for court approval.
  • As we’ll see next, certain Trusts can also help reduce estate taxes.

But what if you want to do more than pass assets smoothly…what if you also want to reducing estate taxes?

 

Goal 2 – We don’t want to leave an estate tax bill.

If you want your kids, grandkids, and beyond to enjoy your property after you’ve passed, an unexpected estate tax bill could be your family’s biggest adversary. Many families end up selling property to pay tax bills after a death in the family.

A trust is one of the most common ways to pass property smoothly and reduce estate taxes, but you won’t use just any trust. You need a trust that is designed to save estate taxes, usually a form of an Irrevocable Trust, as we discuss in Should I Use a Trust to Save on Estate Taxes?

There are far too many estate tax strategies to fully consider here, but it’s important to understand that most involve permanent decisions that limit control of the property during your life in some way. Don’t go it alone. A specialized financial and legal planning team can help you avoid simple mistakes that can result in millions of dollars in unwanted taxes.

Are you at risk of owing estate taxes? Use our calculator to find out!

 

Bonus tip for “snowbirds”

If you spend live in Washington but spend winters in your out-of-state property, consider preparing state-specific powers of attorney. If you need medical care while out of state but only have Washington powers of attorney, your caretakers may have trouble getting them quickly accepted by local administrators in a time where you can’t afford delays.

Living in Washington and owning property in another state like California introduces complexity but can also be a source of enjoyment! This planning requires qualified financial and legal professionals, but with the right team and an effective plan, you can own (and enjoy!) your out-of-state property.

The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.

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