Handling Out-of-State Property in Your Louisville Estate Plan

For many Louisville residents, the dream of owning a vacation cabin in the Smoky Mountains, a beachfront condo in Florida, or perhaps an investment property in a neighboring state is a rewarding reality. You may have also inherited family land situated beyond Kentucky’s borders. While these properties bring joy and financial diversification, they also introduce a layer of complexity to your estate planning that, if unaddressed, can create significant burdens for your loved ones down the road. 

Navigating the interplay of Kentucky law with the laws of other states where you hold property requires meticulous planning and knowledgeable guidance. At Louisville Estate Planning, we frequently assist clients in structuring their estates to thoughtfully account for these multi-jurisdictional property holdings, ensuring their wishes are honored and their families are protected from unnecessary complications. 

The Challenge of “Ancillary Probate”

To appreciate the issues with out-of-state property, it’s helpful to first understand the general process of probate. Probate is the court-supervised procedure of validating a deceased person’s will (if one exists), gathering their assets, paying outstanding debts and taxes, and distributing the remaining property to the rightful heirs or beneficiaries. When a Kentucky resident passes away, their primary probate proceeding, known as “domiciliary probate,” typically occurs in the Kentucky county where they resided.

However, when a Kentucky decedent owns real estate in another state, Kentucky courts generally lack the authority to transfer title to that foreign property. The legal principle of “situs” (Latin for “position” or “site”) dictates that the laws of the state where real property is physically located govern issues related to that property, including its transfer upon an owner’s death. This is where “ancillary probate” comes into play. Ancillary probate is a separate, additional probate proceeding that must be initiated in the state (and often, the specific county) where the out-of-state real estate is located.

Essentially, your executor or personal representative will have to manage not just one probate process in Kentucky, but also a distinct, parallel process in each state where you owned real property. Personal property, such as bank accounts, stocks, or vehicles, is typically governed by the law of the decedent’s domicile (Kentucky) and handled through the domiciliary probate, but real estate is the primary trigger for ancillary administration.

Why Ancillary Probate Can Be a Burden for Your Heirs

The necessity of ancillary probate can transform what might have been a relatively straightforward estate settlement into a more complicated, expensive, and time-consuming affair for your already grieving family. Consider these potential burdens:

• Increased Costs: Each probate proceeding incurs its own set of expenses. This means additional court filing fees, publication costs for notifying creditors in the other state, and, most significantly, the need to hire a separate attorney licensed in that other state to handle the ancillary probate. These costs can eat into the value of the estate assets intended for your beneficiaries.
• Significant Time Delays: Coordinating legal efforts across state lines inherently takes more time. Your Kentucky executor will need to identify and retain counsel in the other jurisdiction, and that attorney will need to get up to speed on the estate. The timelines of two separate court systems must be managed, potentially prolonging the overall settlement process by months, or even years in complex situations. Beneficiaries may have to wait longer to receive their inheritance.
• Added Complexity and Stress: Dealing with the legal system can be daunting even in familiar territory. Requiring your loved ones to navigate the laws, procedures, and court system of another state adds a considerable layer of complexity and stress during an already difficult emotional period. They will be interacting with a different set of rules and potentially unfamiliar legal professionals.
• Privacy Concerns: Probate is generally a public process. Wills are filed with the court and become public records, along with inventories of assets subject to probate. Ancillary probate means that details about your ownership of that out-of-state property, and potentially other aspects of your estate, become a matter of public record in that second jurisdiction as well, further diminishing family privacy.
• Potential for Duplication of Effort: While the ancillary probate is typically narrower in scope than the domiciliary probate (focused mainly on the out-of-state property), there’s still an element of duplicated administrative effort in managing two simultaneous legal proceedings.

Strategic Approaches to Handling Out-of-State Property in Your Louisville Estate Plan

Fortunately, with proactive estate planning, Louisville residents can implement several strategies to avoid or minimize the need for ancillary probate for their out-of-state real estate holdings. The most appropriate approach will depend on your specific circumstances, the nature of the property, and your overall estate planning goals.

The Revocable Living Trust: A Primary Tool

A revocable living trust is often the most effective and flexible solution for managing out-of-state property.

• How it Works: You create a trust document and then transfer the legal title of your out-of-state real estate (and potentially your Kentucky property and other assets) into the name of the trust. You, as the grantor, typically also serve as the initial trustee, meaning you retain full control and management of the property during your lifetime. You can buy, sell, mortgage, or manage the property just as you did before.
• Benefit – Avoiding Probate: Because the trust, not you individually, owns the property at your death, the property is not subject to probate in Kentucky or in the state where it is located. The terms of the trust document dictate how the property is to be managed and distributed by your chosen successor trustee.
• Seamless Transition: Upon your incapacity or death, your designated successor trustee steps in to manage or distribute the trust assets according to your instructions, without the need for court intervention regarding those trust-held assets.
• Efficiency and Privacy: Bypassing probate means a faster, typically less expensive, and private transfer of assets to your beneficiaries.

Joint Ownership with Right of Survivorship (JTWROS)

Holding property in joint tenancy with right of survivorship (or as tenants by the entirety with a spouse) means that upon the death of one owner, the property automatically passes to the surviving joint owner(s) by operation of law, thereby avoiding probate for that asset.

• Apparent Simplicity: This can seem like an easy way to avoid probate for a specific property.
• Significant Caveats and Potential Downsides:

• Loss of Full Control: Adding a non-spouse as a joint owner gives them immediate ownership rights and interests in the property. You can no longer sell or mortgage the property without their consent.
• Creditor Exposure: The property becomes subject to the debts and liabilities of all joint owners. If your co-owner incurs debts or is sued, your property could be at risk.
• Gift Tax Implications: Adding a non-spouse to the title of your property could be considered a taxable gift, potentially requiring a gift tax return.
• Unintended Disinheritance or Distribution: The property passes to the surviving joint owner regardless of what your will or trust might say. This can be problematic if that joint owner is not your intended ultimate beneficiary, or if you have a blended family and wish for children from a previous marriage to inherit. If the surviving joint owner later remarries or has different estate planning wishes, your property could end up with individuals you never intended.
• Incapacity Issues: If a joint owner becomes incapacitated, managing the property can become complicated, potentially requiring a court-appointed conservator for that owner.
• JTWROS is rarely a substitute for comprehensive estate planning and should be approached with caution and full understanding of its implications.

Titling Property in a Business Entity (e.g., LLC, Family Limited Partnership)

Another strategy involves transferring ownership of the out-of-state real estate to a business entity, such as a Limited Liability Company (LLC) or a Family Limited Partnership (FLP).

• How it Works: The LLC or FLP owns the real property. Your ownership interest in the LLC or FLP is considered intangible personal property.
• Potential for Ancillary Probate Avoidance: Since intangible personal property is generally governed by the laws of your state of domicile (Kentucky), your interest in the entity can typically be dealt with through your Kentucky estate plan and probate (or trust administration if the entity interest is in a trust), rather than requiring ancillary probate in the state where the real estate is located.
• Other Benefits: LLCs and FLPs can offer liability protection, which is particularly valuable for rental properties, and can provide a structure for centralized management and gradual transfer of ownership to family members if desired.
• Complexity and Cost: This approach involves the initial costs of forming the entity and ongoing administrative requirements, such as separate tax filings or annual reports. It is often more suitable for investment properties or properties with significant value where the benefits of liability protection and management are paramount.

Transfer on Death (TOD) or Beneficiary Deeds (Where Available)

Some states, though not currently Kentucky for real estate, permit the use of Transfer on Death (TOD) deeds, also known as beneficiary deeds. These deeds allow an owner of real property to designate a beneficiary who will automatically inherit the property upon the owner’s death, bypassing probate in that state.

• How it Works: Similar to a payable-on-death (POD) designation on a bank account, a TOD deed specifies who receives the property. It has no effect during the owner’s lifetime and can be revoked.
• Benefit for Out-of-State Property: If you own property in a state that does recognize TOD deeds, using one for that specific property could avoid ancillary probate in that jurisdiction.
• Limitations: The availability and specific rules for TOD deeds vary widely by state. This is not a universal solution and requires understanding the laws of the state where the property is located. It also offers less flexibility than a trust for managing distributions to beneficiaries, especially minors or those with special needs.

Multiple Wills (“Situs Wills”) – A Historically Used, Less Common Approach

Historically, some individuals would execute a separate will specifically for the property located in another jurisdiction – a “situs will.”

• How it Works: The Kentucky will would govern Kentucky assets, and the situs will (drafted according to the laws of the other state) would govern the out-of-state property.
• Drawbacks: This strategy still involves probate in each jurisdiction. Coordinating multiple wills can be complex, increasing the risk of conflicting provisions or interpretations. With the advent and widespread use of revocable living trusts, which can manage property across multiple states more efficiently and privately, situs wills are generally not the preferred method today.

The Importance of Coordinating Your Overall Estate Plan

Regardless of the specific strategy chosen for your out-of-state property, it is absolutely vital that it is fully integrated with your primary Kentucky estate plan. Your will, any trusts, beneficiary designations on life insurance and retirement accounts, and powers of attorney should all work in harmony. An approach taken for an out-of-state asset in isolation could inadvertently disrupt your broader estate distribution goals or create unintended tax consequences. Your Louisville estate planning attorney plays a key role in orchestrating this comprehensive plan, and can collaborate with legal counsel in other states if necessary to ensure all pieces fit together seamlessly.

What About Taxes?

It’s important to distinguish between avoiding ancillary probate and avoiding taxes.

• Federal Estate Tax: The federal estate tax applies to a decedent’s worldwide assets, including property located in other states or even other countries. However, the vast majority of estates fall below the very high federal estate tax exemption amount, so this is not a concern for most individuals.
• State Estate or Inheritance Taxes: While Kentucky currently does not have its own estate tax or inheritance tax, the state where your out-of-state property is located might. Several states do impose their own estate or inheritance taxes, often with much lower exemption amounts than the federal level. If your property is situated in such a state, its value may be subject to that state’s taxes, even if you are a Kentucky resident. Planning for out-of-state property should include consideration of these potential state-level death taxes, which is a separate issue from the probate process itself.

Practical Steps for Louisville Residents with Out-of-State Assets

If you own property outside of Kentucky, or are considering acquiring such property, taking a few proactive steps can save your family considerable difficulty later:

1. Inventory Your Assets: Create a clear list of all real property you own, specifically noting its location and how it is currently titled.
2. Understand Current Titling: Is the property in your name alone? Held jointly with a spouse or someone else? In an LLC? The current title is a critical piece of information.
3. Review Your Existing Estate Plan: Does your current will or trust adequately and effectively address your out-of-state holdings? Was this property acquired after your plan was last updated?
4. Seek Knowledgeable Legal Counsel: This is the most important step. Discuss your out-of-state assets specifically with an experienced Louisville estate planning attorney. They can analyze your situation and recommend the most effective strategies to align with your goals.

Secure Your Legacy, Wherever It Lies

Owning property in multiple states doesn’t have to lead to a legal tangle for your heirs. While the prospect of ancillary probate and multi-jurisdictional complexities can seem daunting, effective and well-established estate planning solutions are available. By addressing these matters proactively, you can ensure that your wishes are carried out efficiently, your assets are preserved for your beneficiaries, and your loved ones are spared unnecessary expense and distress.

The team at Louisville Estate Planning is committed to helping Kentuckians navigate the intricacies of estate planning, including the unique considerations that arise with out-of-state property ownership. We can help you develop a comprehensive plan that protects your interests and provides peace of mind. We invite you to contact us to schedule a consultation to discuss your specific circumstances and learn how we can assist you in securing your family’s future, no matter where your assets are located.