Military Officers Tend to "Collect" Real Estate
If you've been the military for a while and are now a Senior Officer, there is a pretty good chance you have rental real estate. And, since you've PCS'd every 3 years or so, it is pretty likely that real estate is in a different state than where you are a resident. That complicates the settling of your affairs when you leave this earth.
Probate and Ancillary Probate
When you pass away, the assets that are controlled by your will (or by law if you don't have a will) go through a process called probate. The probate process makes sure that your assets are distributed in accordance with your wishes as set forth in your will and that your liabilities are paid.
What becomes an issue for many retired military officers is the fact, mentioned above, that many of you have real estate in states other than where you are a resident. If this is the case, then the real estate goes through the probate process in the state where it is located. This is called Ancillary probate.
You might think this is no big deal. You'd be wrong. Probate takes time and money. A second probate procedure won't necessarily double the time and money but it will take more time and will cost more than one probate estate.
Avoiding Ancillary Probate
There are two basic ways to avoid probate. Transferring the property by contract or by not owning the property. I know some of you are saying, "I don't want to sell the property." I didn't say sell it, I said don't own it.
- Transfer by contract. You can avoid probate depending on how the property is owned. In some states you can title real estate as "Transfer on Death (TOD)". When the property is titled TOD you designate a beneficiary or beneficiaries that will receive the property when you or your spouse pass away. It is important to note that the TOD instructions supersede what your will says. You might also be able to accomplish probate avoidance with certain joint ownership options, but be careful before you go down this path.
- Don't own the property. One of the most common ways to not "own" the property is to transfer ownership to a trust. The trust is likely to be called either a living, revocable or grantor trust or some combination of those descriptors. No matter what the trust is called, you maintain control of the property and there is no change to your income tax situation remains unchanged. Once the property is transferred to the trust it is no longer controlled by your will but is instead controlled by the instructions in the trust document. Therefore, the property doesn't go through probate. Another option might be to transfer ownership to a business such as an LLC. This might (but also might not) eliminate the ancillary probate as the business should go through probate in the state of your residence. Transferring to a business may not be an option if you have a mortgage on the property.
Don't Try This Without a Net
Senior military officers are confident in their ability and rightfully so. But this is not an area where you should "read a book and figure it out". If you own rental properties there are more than just estate planning concerns. Make sure you put together a team including a financial advisor and estate planning attorney that understands military finance nuances, real estate investments and their taxation plus probate avoidance.