By Andrew Bellm
When a Tennessee resident owns real property in another state, estate planning becomes more complex than simply drafting a will or revocable trust. The reason is that real estate is governed primarily by the law of the state where it is located (the “situs” state), and that state will typically control how the property is transferred at death. This creates both planning opportunities and coordination challenges that should be addressed proactively.
Out-of-State Real Property and Ancillary Probate
One of the first issues to understand is ancillary probate. If a Tennessee resident dies owning real estate in, for example, Florida or North Carolina in their individual name, the estate may need to be opened not only in Tennessee (the domiciliary estate), but also in the state where the property is located. That second proceeding is called ancillary probate.
Ancillary probate can add cost, delay, and administrative complexity. It often requires hiring local counsel in the situs state, complying with that state’s probate rules, and coordinating transfers across two court systems. For this reason, most modern estate plans attempt to avoid direct individual ownership of out-of-state real property.
Core Planning Structures to Avoid Complications
The most common planning tools used to address out-of-state real property include revocable trusts, limited liability companies (LLCs), and specialized trust structures under Tennessee law. Each serves a slightly different function:
A revocable living trust is often the foundational solution. When properly funded, out-of-state real estate is retitled from the individual into the trust during life. At death, the successor trustee can transfer or manage the property without probate in the situs state, assuming proper titling.
An LLC is frequently used for investment or rental real estate. The individual contributes the property to the LLC, and then their trust owns the LLC interest. This can provide liability protection and centralized management, but it does not eliminate the need for careful estate planning of the ownership interest itself. The LLC may also need to be registered in the situs state if it is considered to be doing business in that state.
Beyond these traditional tools, Tennessee offers additional planning structures that are particularly relevant, including the Tennessee Community Property Trust.
Tennessee Community Property Trust and Out-of-State Real Estate
The Tennessee Community Property Trust (often abbreviated CPT) allows married couples to opt into a community property regime by agreement, even though Tennessee is not a traditional community property state. The significance of this election is primarily tax-driven.
The most important benefit of a CPT is the potential for a “double step-up” in income tax basis at the death of the first spouse. In community property jurisdictions, both halves of community property typically receive a new fair market value basis at the first death, rather than only the decedent’s half. Tennessee’s CPT statute is designed to approximate this result for property properly characterized and titled within the trust structure.
However, when out-of-state real property is involved, several additional considerations arise:
First, the situs state will still govern title and real property law. That means the deed transferring out-of-state real estate into a Tennessee Community Property Trust must be valid under the law of the state where the property is located. In most states, this is achievable, but the deed must be properly drafted and recorded in that jurisdiction.
Second, Tennessee’s law does not govern the real estate. Thus, the out-of-state real property may not qualify as community property. In order to qualify as community property, the out-of-state real property may need to be deeded into an LLC so that the LLC interest is owned by the Tennessee Community Property Trust. The LLC interest is considered personal property, which would be subject to Tennessee law under the Tennessee Community Property Trust, rather than real property governed by the law of the situs state.
Third, practitioners must consider whether the administrative benefits of the CPT outweigh the added complexity when assets are spread across multiple states. In many cases, CPTs are most effective when the couple has significant appreciated assets and a desire to optimize basis step-up planning, even if some assets are located outside Tennessee.
Coordinating Multi-State Real Estate in an Estate Plan
When a client owns real property in multiple states, the most important planning objective is coordination. The estate plan should ensure that all properties—regardless of location—are aligned under a single governing structure, whether that is a revocable trust, a CPT, or a combination of entities.
Key considerations include ensuring deeds are properly recorded in each state, confirming that title insurance and lender requirements are satisfied, and reviewing how each state treats trusts and entity ownership. It is also important to periodically review the plan as properties are acquired or sold, since a mismatch between ownership and estate planning documents is one of the most common causes of probate complications.
Conclusion
Out-of-state real property introduces an additional layer of complexity into Tennessee estate planning, but it is highly manageable with proper structuring. Avoiding ancillary probate is typically the first goal, achieved through trusts and entity ownership. From there, advanced strategies such as the Tennessee Community Property Trust can provide meaningful tax and asset protection benefits, but only when carefully coordinated with the laws of the state where the real property is located.
In most cases, the most effective plans are not the most complex. Instead, they are the most consistent, with ownership, titling, and trust design working together across state lines.