Multi-state estate planning is complex and relies heavily on your state’s laws. New Jersey and Pennsylvania laws regarding real estate in other states can lead to common concerns and challenges for high net worth individuals.
Careful planning can help create an estate plan that is in the best interest of your estate, but the plan must go further than a standard estate plan.
Multi-State Estate Planning
Estate planning must be unique if you own property in multiple states. A lot of residents in New Jersey and Pennsylvania have second homes either at the New Jersey shore, Poconos, anywhere in Florida, the Carolinas, and a multitude of other states.
State laws dictate that a person can only have one domicile.
A domicile is a place you reside most often and list as your residence for tax purposes, but if you spend time in two states, you’ll come across domicile problems.
Multi-state estate plans must consider which home you reside in most often. If there’s an equal distribution of time between two homes, the court must decide on your domicile. You don’t want your estate to go through court proceedings, nor have your domicile changed from NJ or PA to another state.
Estate Tax Considerations in Multi-State Estate Planning
If, for example, the court found your domicile to be Florida and not Pennsylvania, Florida would be the state where your:
- Estate pays taxes
- Income tax is paid
- Probate takes place
Estates may be able to avoid federal estate taxes, but each state has its own rules on estate taxes.
- New Jersey estate taxes range from 0% to 16%, depending on the estate value and the relationship of the beneficiary or transferee and the decedent.
- Pennsylvania estate taxes range from 0% to 15%, with taxation depending on the heir and their relationship to the decedent. Direct descendants pay a flat 4.5% tax.
It may be beneficial to have your primary residence in one state over another due to the estate tax of your state.
You can decide to declare your domiciled state in your estate plan, but someone could contest your declaration if the facts don’t line up. A smart choice is to solidify the domiciled state by maintaining the following in that state:
- Voting registration
- Bank accounts
Why You Need a Revocable Living Trust
Estate planning laws were written 300+ years ago and didn’t contemplate that we’d be able to own real property in Florida given our horse and buggy transportation!
“By placing assets (such as a home, cabin or business interest) in a revocable trust, or by naming the trust as the beneficiary on non-probate accounts, such as life insurance or brokerage accounts, your assets will be distributed according to your wishes and will do so outside of probate,” explains Kiplinger.
Ancillary probate, or probate in a state that is not considered your primary residence, can occur when real property is owned in another state. It’s always in an estate’s best interest to avoid probate.
Probate can lead to higher estate expenses and inconvenience for your heirs.
Ancillary probate can be avoided using several estate planning tools, like a family limited partnership or an LLC, but by far the greatest tool is a revocable living trust, or RLT.
Here’s the reality: If you own property in multiple states, you have to go through probate in every state in which you own real estate.
So, if you owned property in 5 states, that’s 5 attorneys, 5 ancillary probates…
OR, you can create a revocable living trust in Pennsylvania, retitle the other 4 properties in the name of the revocable living trust, and when you die, you only own Pennsylvania property. And if you move, you just amend your RLT to be of the state that you’ve moved to.
Final Notes on Multi-State Estate Planning
Property can be passed down to beneficiaries in several ways. Probate is not ideal, as we’ve previously covered, but there are additional strategies that can be leveraged in an estate plan:
- Co-ownership of the property through joint tenants. Joint tenants take control of the property upon your demise.
- Wills allow for the passing of property to beneficiaries, but a simple will does not offer enough protection for a high net worth estate. Multiple estate planning measures should be taken to lower the risk of probate and a contested will.
- Qualified personal residence trust (QPRT) can be created, which removes a property or residence from your estate with a reduced gift tax. You retain the rights to the property for the duration of the trust.
- Transfer on Death (TOD) transfers property to individuals or charities upon your death, but many states do not offer this option. An attorney will be able to determine if a TOD is in your estate’s best interest, depending on respective state laws.
Multi-state estate plans must be drafted to match the laws of each state where the property is owned. A trust may be in your estate’s best interest, but there are several estate planning tools and strategies that can be implemented to reduce taxes, risks, and expenses for beneficiaries.
When creating a multi-state estate planning strategy, it’s important to have an experienced Estate Planning Attorney in your corner that understands your state’s laws and can minimize the expenses of your estate.