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

Owning property beyond Maryland’s borders represents a dream realized for many residents, but it introduces complexities in estate planning due to the interaction between different state laws. While comprehensive estate planning is vital for all assets, property located outside of Maryland requires special attention due to these multi-state legal issues. 

Failing to properly address how your out-of-state property will be handled after your passing can lead to increased costs, delays, and administrative burdens for your beneficiaries. Proactive planning, guided by knowledgeable counsel familiar with these estate planning challenges, can mitigate these risks and ensure a smooth transfer of your assets.

The Issue of Ancillary Probate

To appreciate why out-of-state property demands specific planning, consider the process of probate, a court-supervised process validating a Will, paying debts, and distributing assets. However, a Maryland court’s authority stops at the state line, necessitating ancillary probate in the state where the out-of-state real property is located. This means if you own property in another state, like Florida or Pennsylvania, separate probate cases may be required in each state. 

The requirement for ancillary probate introduces several significant downsides:

• Increased Costs: This is often the most immediate impact. Ancillary probate means multiplying expenses. Your estate will face additional court filing fees in the other state(s), costs associated with publishing notices to potential creditors there, and potential appraisal fees for the out-of-state property. Perhaps most significantly, it necessitates hiring a local attorney licensed in that specific state to handle the ancillary proceedings, adding another set of legal fees on top of those for your Maryland estate administration. These costs can erode the value of the property being transferred.
• Time Delays: Running probate in multiple states simultaneously drags out the entire estate settlement timeline. The Personal Representative must manage proceedings in different jurisdictions, each with its own deadlines and procedural requirements. Selling or distributing the out-of-state property is often put on hold until the ancillary probate process is complete, which can take many months, or even years, longer than settling the Maryland portion of the estate alone. Beneficiaries are left waiting, and the property may require ongoing maintenance and expense during the delay.
• Complexity and Stress: The Personal Representative, often a family member already grieving, faces the daunting task of navigating unfamiliar legal territory. They must find and hire counsel in another state, provide certified copies of Maryland court documents (a process called exemplification), potentially travel to the other state, and comply with a different set of rules and forms. This adds layers of administrative work and significant stress to an already demanding role.
• Potential for Different Outcomes or Interpretations: While the U.S. Constitution’s “full faith and credit” clause generally means states must respect the validity of Wills properly executed and probated elsewhere, differences in state laws can still cause complications. For example, rules about creditor rights, deadlines for claims, specific requirements for selling real estate, or protections like homestead exemptions (as seen in Florida) can vary and impact how the out-of-state property is handled within the ancillary proceeding.

Ancillary probate fundamentally complicates what could otherwise be a more straightforward process, working against the goal of efficient estate administration.

Strategies for Simplifying the Transfer of Out-of-State Property

Fortunately, Maryland residents have several effective legal strategies available to bypass the need for ancillary probate and simplify the transfer of their out-of-state real estate holdings. Choosing the right approach depends on your specific circumstances, goals, and the nature of the property.

Revocable Living Trust: This is often the most comprehensive and flexible solution.

• How it Works: You create a legal entity known as a Revocable Living Trust during your lifetime. You then formally transfer the title of your out-of-state real estate (and potentially other assets like bank accounts, investments, and even your Maryland home) from your individual name into the name of the trust. You typically serve as the initial trustee, retaining full control to manage, use, sell, or refinance the property just as before. The trust document names a successor trustee (a person or institution) to take over management if you become incapacitated or upon your death.
• Avoiding Probate: Because the trust, not you individually, legally owns the property, the asset does not need to go through probate court in any state upon your death. The successor trustee simply follows the instructions you laid out in the trust document to manage or distribute the property to your named beneficiaries, bypassing both Maryland probate and ancillary probate in the state where the property is located.
• Additional Benefits: Trusts offer added advantages like privacy (probate is a public record, while trust administration is typically private) and built-in planning for potential incapacity (allowing the successor trustee to manage assets if you cannot).
• Funding is Key: Simply creating a trust document is not enough. The essential step is “funding” the trust by retitling your assets, including preparing and recording new deeds for all real estate (in Maryland and other states) in the name of the trust.

Joint Ownership with Right of Survivorship: This involves owning property with one or more other individuals in a way that includes an automatic right of inheritance.

• How it Works: Common forms include “Joint Tenancy with Right of Survivorship” (JTWROS) or, for married couples in Maryland and some other states, “Tenancy by the Entirety” (TBE). When one owner dies, their share automatically passes directly to the surviving joint owner(s) by operation of law, outside of the probate process.
• Avoiding Probate (Initially): This titling effectively avoids probate for the specific property upon the death of the first owner.
• Significant Downsides: This strategy has notable drawbacks. It only avoids probate on the first death; when the surviving owner eventually passes away (or if both owners die simultaneously), the property will then require probate unless another planning method is in place. Adding a non-spouse as a joint owner can be deemed a taxable gift, potentially requiring a gift tax return. It also exposes the property to the debts and liabilities of all joint owners and requires their consent for major decisions like selling or refinancing, resulting in a loss of personal control. For these reasons, it’s often not the preferred method, especially for non-spousal arrangements.

Transfer-on-Death (TOD) Deeds: Also known as Beneficiary Deeds in some locations.

• How it Works: These deeds function like a beneficiary designation for real estate. The owner records a deed during their lifetime that names a specific beneficiary (or beneficiaries) who will automatically inherit the property upon the owner’s death, bypassing probate.
• State Law Dependency: This option’s availability is entirely dependent on the laws of the state where the property is located. Only about half of U.S. states currently authorize TOD deeds for real property. Maryland does not permit TOD deeds for real estate. Therefore, this is only a possibility if the state where your out-of-state property resides has enacted specific TOD legislation.
• Limitations: Even where available, TOD deeds are less flexible than trusts. They typically don’t allow for complex distributions, contingency planning (what if the beneficiary dies first?), or management during the owner’s potential incapacity.

Detailed Will Provisions: While relying solely on a Will won’t avoid ancillary probate for real estate, specific provisions can still be helpful.

• Clarity of Intent: Your Maryland Will should clearly state who you wish to inherit the out-of-state property.
• Personal Representative Guidance: You can nominate a Personal Representative (executor) who is capable and willing to handle the complexities of multi-state administration. You might also grant them specific powers within the Will related to managing or selling the out-of-state property, which can sometimes streamline the ancillary process once initiated.
• Does Not Avoid Probate: Remember, these provisions guide the ancillary probate process but do not eliminate the need for it if the property is titled solely in your name.

Limited Liability Companies (LLCs): Sometimes used, particularly for investment or rental properties.

• How it Works: You transfer ownership of the out-of-state property to an LLC that you create. Your ownership interest in the LLC is considered personal property (like owning stock). Generally, personal property is governed by the laws of your domicile (Maryland). Therefore, upon your death, your interest in the LLC passes according to your Maryland Will or Trust, potentially avoiding the need for a separate real estate probate in the other state.
• Complexity and Cost: This involves the expense and administrative effort of forming and maintaining a business entity, including potential annual report filings and registered agent fees in the state of formation and potentially the state where the property is located. It also has distinct tax implications (often requiring separate tax identification numbers and filings) and is usually more complex than using a trust for non-business properties.

Comparing these options, the Revocable Living Trust often provides the most robust and adaptable framework for managing out-of-state property within a comprehensive Maryland estate plan.

Important Considerations and Potential Challenges

Beyond choosing a primary strategy, several other factors require attention when planning for out-of-state property:

• State-Specific Laws: Real estate laws, probate procedures, and even deed requirements can differ dramatically from state to state. For example, Florida has complex homestead rules impacting property taxes and creditor protection. Some states are community property states, which have unique implications if property was acquired while living there. What works smoothly in one state might be ineffective or problematic in another. Generic solutions rarely suffice.
• Tax Implications: Be aware of potential taxes beyond federal estate tax. Does the state where your property is located have its own state estate tax or inheritance tax? Maryland has both (though inheritance tax applies only to certain beneficiaries). Owning property in another state could potentially subject your estate or beneficiaries to taxes there as well. Rental properties also generate state income tax liabilities in the situs state, which must be filed appropriately during your life and potentially by your estate or trust after death. Consulting with tax professionals knowledgeable about multi-state taxation is often advisable.
• Property Management During Incapacity and After Death: Who will manage the out-of-state property if you become unable to handle your own affairs? Who will handle maintenance, pay property taxes and insurance, deal with renters (if applicable), and ultimately prepare the property for sale or distribution after your death? Your estate plan should address these practicalities, perhaps by giving clear authority to your agent under a Power of Attorney during life, and to your Successor Trustee or Personal Representative after death. Having a local property manager might be necessary.
• Communication with Beneficiaries: Clearly communicating with your intended beneficiaries about the existence of the out-of-state property and the plan for its transfer can prevent confusion, manage expectations, and reduce the potential for disputes after you are gone. Surprises during estate administration often lead to added stress and potential conflict.
• Regularly Updating Your Estate Plan: Life changes, laws change, and your assets change. Acquiring new out-of-state property, selling an existing one, refinancing, or changes in your family situation (marriage, divorce, births, deaths) are all events that should trigger a review of your estate plan with your attorney to ensure it still accurately reflects your wishes and effectively manages all your assets, including those outside Maryland.

Addressing these considerations proactively helps ensure your plan for out-of-state property is not just legally sound but also practical and resilient.

Contact Our Experienced Maryland Estate Planning Lawyers Today

Owning property in multiple states adds rewarding dimensions to life but undeniably complicates the estate planning process for Maryland residents. Taking the step to review your assets and plan appropriately for your out-of-state property is an investment in your family’s future well-being. If you own real estate outside of Maryland, we encourage you to take proactive steps. 

Contact Baddour Law Firm today to schedule a consultation. Let us help you navigate the complexities and implement a comprehensive Maryland estate plan that protects all your assets, wherever they may be.