What To Do When a Parent Dies Owning Real Estate in Vermont
Posted on Aug 06, 2014
By John C. Newman, Esq.
and Matthew D. Getty, Esq.
Tax & Estate Planning Department
Not infrequently, our law firm is contacted by the out-of-state heirs of a nonresident of the state of Vermont who has died while owning an interest in real property located in Vermont. Typically, the property is owned jointly, through a lifetime revocable trust or through a limited liability company. In the unfortunate case where the property is owned individually by the decedent, the property will be subject to an ancillary probate process in Vermont. This article will discuss four different ownership possibilities in addition to individual ownership and walk the reader through the different steps that must be accomplished after the relative has died. These same options apply to both residents and nonresidents interested in avoiding probate proceedings.
Vermont is a full administration state in terms of its probate rules. When Vermont adopted the United Kingdom Wills Act of 1837, it carried over the new probate rules for the administration of wills. These rules have not been substantially amended since that time. This means that when an individual dies owning real property in his or her own name, the property is subject to probate in the State of Vermont. This probate will be a primary probate when the individual was domiciled in the State of Vermont, meaning that all of the individual’s probate assets will be subject to administration in our state. The probate of the will of a nonresident is called an “ancillary probate,” and special rules apply. Nevertheless, the rules do not really limit in any way the administrative burden of administering an estate in Vermont, but merely suggest a methodology for how to admit a will to probate without having to prove in Vermont its valid execution. The nonresident probate process is essentially the same as that for a Vermont resident.
The probate process could take anywhere from three to twelve months (or longer in extreme cases) and put a considerable documentary and administrative burden on the individual named as the executor in the will or the individual acting as administrator of an intestate estate. Notices will need to be sent to beneficiaries and consents obtained; creditors may need to be notified; a tax clearance will need to be sought from the Vermont Department of Taxes; an accounting will need to be filed with the Probate Court; and a Decree of Final Distribution will have to be drafted and approved by the local probate judge. In accomplishing these formalities, the clerk of the local Probate Division of the Vermont Superior Court will require that the executor/administrator use the approved Vermont forms, which can be located through a website maintained by the Vermont court administrative office.
In our own experience, the fees for representing a client working through this burdensome administrative process typically can amount to $2,000 to $4,000 before the process is closed, and can be more when complex issues arise. Notably, the cost of probate bears little relation to the size of the probate estate. All of the same administrative hurdles need to be cleared for a small, illiquid asset, as are necessary for a larger estate. For these reasons we recommend that Vermont real property of a nonresident be held in some other form of ownership that passes the property outside of the Vermont probate process.
One of the unfortunate aspects of a lack of planning will be that the out-of-state decedent owning Vermont real property may have selected an individual form of ownership, perhaps thinking that this seemed simplest. The alternatives are discussed below.
Joint Tenancy With Right of Survivorship
“Joint tenancy with right of survivorship” is one of the more self-explanatory legal terms. Under this form of ownership, property is titled in the names of two or more joint owners who hold an undivided interest in the whole. If any individual owner dies, the remaining co-owners inherit automatically by operation of law. No probate proceeding is required to transfer the decedent’s interest. Rather, a certified death certificate would be recorded in the town land records in order to establish that the decedent’s interest in the chain of title has been extinguished.
Joint tenancy is a useful tool for transferring property to heirs. Such titling should not be used without forethought, however. At a very basic level, joint titling can present you with new risks with respect to the liabilities and creditors of a joint owner. For estates subject to estate tax, joint titling can have unintended consequences, particularly for married couples. The decedent’s interest will also remain subject to the Vermont estate tax, and tax could be due even if the particular property located in Vermont would be subject to the marital deduction. For more information on the complexity of the Vermont estate tax, please see our website for the article “Planning for the Vermont Estate Tax.” As you can read there, the current Vermont estate tax exemption is $2,750,000, but Vermont tax law does have some quirks in how the exemption is computed.
Owning a second home also poses challenges for long-term-care Medicaid planning, and adding a joint owner will complicate such planning. You should always consult with a legal advisor before titling property jointly with another person.
Tenancy By The Entirety
Tenancy by the entirety is a special form of joint ownership for married couples. This form of ownership has all the features of joint ownership with right of survivorship, but is enhanced by the fact that neither tenant can break the tenancy without permission of the other. This aspect provides a high degree of creditor protection, but is still subject to the other disadvantages noted above regarding joint ownership. In particular, owning property as tenants by the entirety can be inefficient from an estate tax perspective. A surviving spouse can still avoid a probate proceeding by changing the form of ownership after the death of the first spouse.
Trusts can be used for various estate planning purposes. One of those purposes is to avoid probate. Unfortunately, we periodically encounter estate plans, particularly from New York and New Jersey, where no assets were funded into the trust during the lifetime of the decedent. When that is the case, it will be necessary to undergo an ancillary probate proceeding in Vermont that is likely to be just as involved, if not more so, than the proceeding in the home state. If you or your parent have an estate plan prepared that involves a revocable trust, we strongly recommend that you contact a Vermont lawyer to have a deed prepared to title your Vermont property in the name of the trustee of that trust. Note that property held in trust is still subject to the Vermont estate tax.
Finally, you or your parent might consider owning your Vermont property through a Vermont business entity such as a limited liability company (LLC). An LLC can be a particularly useful tool for a family vacation home or other property when you expect the ownership to be passed down to multiple owners in future generations. The operating agreement for the company can be used to set forth the rules governing the maintenance, use, and disposition of the property (or an individual’s ownership in it). An individual member’s interest in the property can be transferred by a designation of successor or otherwise in the individual’s estate plan without any need for a probate proceeding in Vermont. A membership interest itself could be jointly owned. Because an LLC interest is intangible personal property, we do not think it is subject to estate tax under current Vermont law. The Vermont Department of Taxes might well disagree with this position. Again, for additional information regarding the Vermont estate tax, please see our firm website for the article “Planning for the Vermont Estate Tax.”
A Vermont lawyer is likely to be involved with you or your parent’s Vermont property and estate plan at some point. If you do not plan in advance, it is likely that your heirs will pay more in fees to that lawyer than you would have paid if you had done some estate planning during your lifetime. Not doing a plan is only “simpler” for the individual who is deceased and no longer needs to worry about it. The Vermont lawyer who handled your real estate transaction in the first instance likely will be happy to assist you or your heirs, in either case.