Estate planning is especially important when you own property in more than one state. Although your will is generally subject to the law of the state in which you reside at the time of your death, there may be a need to open an additional (or “ancillary”) estate in any other state where you own real estate or other property outside of California’s jurisdiction. In some cases, your estate may be liable for another state’s taxes.
Brothers Fight Over Nebraska Property in California Court
Here is a recent example. A California husband and wife created a living trust and transferred all of their property into it, including two pieces of farmland in Nebraska that the wife’s family had owned for more than a century. According to the terms of the trust, after the couple died, the trust’s assets were to be equally divided between their two children. The trust also required a division of the trust into “A” and “B” subtrusts after the first spouse died. This is a common estate planning tool used to keep the surviving spouse’s property in trusts separate and apart from the deceased spouse’s property.
In this case, the wife passed away first. The husband, as the surviving spouse, then subdivided the trust, placing one parcel of the Nebraska farmland into the “A” trust (representing his property) and the other parcel into the “B” trust (representing his deceased wife’s interest).
After the husband died in 2012, the two brothers became co-trustees of the trust. One issue they had to deal with was Nebraska’s inheritance tax. While most states, including California, do not impose inheritance taxes, a handful still do. Under Nebraska law, children who inherit more than $40,000 worth of property from a parent must pay tax. The tax rate is 1% of the “clear market value” of the inherited property above the $40,000 exemption.
One of the brothers hired a Nebraska attorney to assist him with determining the inheritance tax owed. They ultimately filed an accounting with the Nebraska probate court stating the “fair market value” of both parcels was approximately $228,000. The court ultimately accepted this calculation as the “clear market value” and assessed the inheritance tax accordingly.
But litigation then broke out between the two brothers in California court. Under an amendment to the trust adopted by the parents while they were still alive, one of the brothers had an option to purchase the farmland before the trust assets were subsequently divided into the “A” and “B” sub-trusts. This did not happen after the mother’s death, however, and the father apparently excluded any mention of this option when he later signed a restatement of the trust. Nevertheless, the brother holding the option sued to enforce his rights.
The other brother unsuccessfully challenged this claim. The probate court, and later the California Court of Appeal, held the option remained valid at least to the parcel in the father’s “A” trust. The brother was therefore entitled to purchase that piece of property based on the value assessed for Nebraska inheritance tax purposes.
Need Estate Planning Advice?
The above case is an illustration and not a complete statement of the law on these subjects. If you need advice from an experienced San Diego estate planning attorney on how to deal with your own property as part of a trust, contact the Law Office of Scott C. Soady today.