Understanding different ways of owning real estate is important because the way real property is titled influences Medicaid results, taxes, and probate avoidance. You may need to lockdown Medicaid, and you certainly don’t want to lose your house and land in the process. And, of course, minimizing or avoiding taxes is also nice.
Blame the English for our confusing real property law. I am convinced that the concepts involved in this article were invented in 1095 at Ye Whyte Horse upon Thames Taverne four hours after closing time and Sir John Falstaff and some of his barrister buddies had gotten a bit into their cups.
First, let’s break down the different types of ownership interests. Later, we’ll look at the impacts of those different ownership interests.
The most common way for a single person to own real property is called fee simple. Someone with fee simple title completely owns the property. She can sell it, give it away, rent it out, use it as security on a loan and do pretty much anything she wants with it (that isn’t otherwise illegal, of course). She is also responsible for paying the taxes on the property and any debts encumbering the property. The property is subject to the claims of her creditors. When the owner dies, the property passes through her estate (as directed by either a will or the state laws of intestacy).
Tenancy in Common
If two or more people own real property, the property is likely a tenancy in common. Think of it as something like a partnership among the owners. Each can use the property (unless they have a contract to the contrary). Each can sell his share, give it away, and use it as security for a loan. If one owner dies, his share passes as directed by his will or the laws of intestacy. Creditors can claim against his share. In some states (not North Carolina), a married couple is presumed to own property as tenants in common, although they can make other arrangements in a deed (such as a joint tenancy discussed below).
Finally, tenancies in common do not need to be equal percentages.
Example: Paul, John, George, and Ringo owned a recording studio on expensive real property. After John and George died, the land was owned by Paul, Ringo, and each of John’s and George’s estates. Paul and Ringo eventually bought out the estates (they tired of dealing with Yoko) and they now own the land as equal tenants in common.
Joint Tenancy With Rights of Survivorship
This type of ownership might seem similar to tenancy in common, but it isn’t. The difference is that if one owner dies, the other owner (or owners) immediately takes the deceased tenant’s share pro rata.
Example: Paul and Ringo decided that it would be nice if the survivor of the two of them could automatically own the land upon the death of the first of them to die. They changed the ownership to a joint tenancy with rights of survivorship. When one of them dies, the other will automatically own the property.
Under Ye Olde English law, joint tenancies had to be equal percentages. That has not been the case for centuries in North Carolina – although that topic was subject to some debate. Sometime ago, however, the General Assembly clarified the law to state that unequal percentages in a joint tenancy were fine.
Tenancy by the Entireties
A few states (North Carolina included) have retained Ye Olde English tenancies by the entireties. Tenancies by the entireties are unique to marital status. If a married couple purchases real estate, upon the death of one spouse the other spouse automatically owns the property, free of the claims of creditors solely of the deceased spouse.
In North Carolina, if real property is conveyed to two married persons, the real property is presumed to be tenants by the entireties. If the couple wishes to own the property as tenants in common (maybe it is a second marriage) the deed must specifically say “tenants in common.” Also, neither spouse, acting alone, can change property out of a tenancy by the entireties – they’ll both have to sign the deed.
Example: Wilma and Fred bought a home in Bedrock, North Carolina. Fred died, owing thousands of rubles in gambling debts. Wilma owns the house free and clear (although I understand she has been getting threatening phone calls). On the other hand, if Wilma and Fred had borrowed money from Barney, the home could be subject to Barney’s claims if Wilma did not repay.
By the way, if a besotted couple purchased real estate before The Big Day, they’ll own the real estate as tenants in common. If they want it to be tenants by the entireties after The Big Day, they’ll need to prepare a new deed into the two of them as “tenants by the entireties.”
Now For Life Estates . . .
If one person owns the right to occupy and use property for her remaining life (she is called the “life tenant”) and the title specifies that the property passes automatically at the instant of the life tenant’s death (these folks are called the remainder interests . . . in the less gentle times of about 25 years ago they were called the remaindermen) the result is a life estate. Many folks call it “life time rights.”
While the life tenant has a right to live on the property or perhaps to collect rent on the property, she also has the responsibility of keeping it up and paying taxes on it.
Although theoretically a life tenant can encumber her life estate or sell her life estate, all she can do is dispose of or restrict whatever it is she owns . . . a life estate. No banker in his right mind will lend against a life estate because when the borrower dies . . . poof! . . . so does the banker’s security. The property passes immediately and automatically to the remainder interest holders. Same thing happens with respect to the life tenant’s creditors. Poof! Gone. Now don’t get excited . . . if the life tenant owned the property in fee simple and encumbered it before setting up the life estate the creditor isn’t going anywhere until someone pays up!
How To Set Up A Life Estate:
Two ways. A fee simple property owner can set up a life estate for himself by conveying a remainder interest in the property to the intended remainder interests. The deed may say something like “I, Falstaff, the Grantor, give Blackacre to Prince Hal, but retain a life estate in Blackacre.”
A way to set up a life estate for another person is for a fee simple property owner to convey property to another person as the life tenant and to yet another person as the remainder interest owner. The deed may look like this: “I, Hotspur, convey Blackacre to Falstaff for life, with a remainder interest to Prince Hal.”
Next, let’s look at the Medicaid, tax and probate issues associated with these different ownership rights.
STAY TUNED: THERE WILL BE A PART TWO OF THIS ARTICLE POSTED ON AUGUST 1, 2022