Let’s say you’ve inherited real property or, maybe, you’re looking to pass along some of your own. Either way, do you know what the nature of the ownership interest is or will be? Many people who inherit property receive the property outright, meaning they’re the sole owner. But there are many ways that property interests can pass and there are many benefits to looking at all the options.

Tenants in Common

If you inherit property along with someone else other than your spouse, you will hold the property as tenants in common (unless the will/trust specifies otherwise). As tenants in common you have an undivided interest in the property. This means that you may own a one-half or one-third interest in the property ,but you still have an equal right to use and occupy the property.

Under this form of ownership, there are some duties owed to the other owners. For example, you cannot lay waste to the property or you could be liable for those damages. Furthermore, if you “oust” one of the other tenants e.g. you affirmatively deny them the ability to use, occupy, or enjoy the land/home, the other tenants may charge you rent based on the fair market value of the property.

When one of the tenants passes, their property interest will pass to their heirs. Their heirs will assume their place as a co-tenant. This method of ownership does not avoid probate and the interest/title in the property must pass through the estate to vest in the heir. 

Joint Tenants with Rights of Survivorship (JTROS)

JTROS is very similar to tenants in common. A very important distinction, however, is what happens to the property interest when one of the tenants dies. Let’s say that A and B own a home as JTROS. When A dies, her property interest will immediately go to B. B will be the sole owner of the property immediately upon A’s death.

This method of ownership avoids probate. The interest in the land does not pass through the estate of A because her interest immediately vested in B when A died.

Tenancy by the Entirety

This form of ownership is essentially JTROS for married couples and is only available for married couples. In NC, if a married couple purchases property during their marriage, it is, by default, title tenancy by the entirety. If property was purchased prior to the marriage, it will need to be re-titled to make it tenancy by the entirety property.

Similar to JTROS, there are survivorship rights in the property, meaning if one spouse dies, the other immediately owns the whole property. Also, similar to JTROS, this form of ownership allows the owners to avoid probate.

The important function of tenancy by the entirety is its protection against creditors. If a couple owns property as tenants by the entirety, the creditor of one of the spouses cannot go after the property. Note, if it is a creditor of both of the spouses, the property is fair game.

Life Estate

A life estate is a lifetime interest in property. The interest can be measured by the life of the individual holding the interest of by another person (called: “life estate pur autre vie”). Let’s say A owns a home and she wants B to live in that home but she wants it to pass to her daughter C when B dies and not B’s heirs. A would give B a life estate interest in the home and make C the “remainderman”. This means that the home would be B’s for life, and when B dies, the home will be solely owned by C or C’s heirs.

The holder of the life estate interest (B) can use and occupy the property. However, they are restricted from selling the property, and can be liable for laying waste to the property.

This form of ownership avoids probate because the interest in the property held by C immediately vests in C upon B’s death.

Enhanced Life Estate Deed (Lady Bird Deed)

A ladybird deed is very similar to a life estate deed. Its main delineation is how it is treated with respect to Medicaid. Under the Medicaid rules, an applicant can’t have gifted property within the applicable lookback period or they will be subject to the penalty. However, a ladybird deed is an exception to that rule. It allows the owner of the property to essentially place a beneficiary on the property as if it were a life insurance policy or an IRA without it being a gift that triggers the lookback period.

Furthermore, the owner of the home is not restricted from selling or conveying the property, nor will they be liable for laying waste to the property. Also, the property does not pass through probate. The interest in the property immediately vests in the designated “beneficiary” upon the owner’s death. In North Carolina, Medicaid cannot place liens on property that doesn’t pass through the estate i.e. property that goes through probate. Thus, the ladybird deed allows the owner to place a beneficiary on the property, avoid triggering the lookback period, and avoid it being subject to any Medicaid liens.

So, what does this look like? Let’s say A owns a home and some land and wants to apply for Medicaid. She eventually wants B to inherit the home. However, she doesn’t want to trigger the lookback period by gifting the home to B. She also wants to avoid Medicaid from placing any sort of lien on the home. So, A has her lawyer draft a ladybird deed on the home and the surrounding property. Eventually, A passes away and the home goes to B immediately upon the death of A. B is the sole owner of the home and hold the property free of any lien. Note, a ladybird deed can be place on a home with more than one owner and more than on “beneficiary” can be designated.

Conclusion

It is important to understand the nature of your ownership interest in your property or the property you inherit. Before you make your estate plan, you should sit down with an attorney to review the best options that fit your desires, your finances, and your family.