By: Attorney Grant Brown
One of the first steps in Estate Planning and Estate Administration is determining what interests are owned in the property. Property is generally divided into two main categories, personal property and real property. Real property is land and anything that is attached to the land, like a house. Personal property is generally everything that is not land or attached to land, so everything else.
There are many different types of ways to own real property in North Carolina. The most common ways that we see property ownership are: (1) sole ownership; (2) tenants in common; (3) joint tenants with right of survivorship; and (4) tenants by the entirety. In the paragraphs to follow, I will go over each of these and explain some of the advantages and disadvantages of each.
Sole ownership is the most obvious. Like the name infers, when property is solely owned, only one person has title to the property. Therefore, only one person is needed to make any decisions regarding the property. A sole owner can sale, rent, or use the property as collateral. Sole ownership is simple, until more individuals get involved, like spouses or children. For example, if a sole owner has two children and leaves the property in equal shares to the children, the children do not become sole owners of one-half of the property. The children become tenants in common, which brings us to the second form of ownership.
Tenants in common (“TIC”) is when two or more individuals own an undivided interest in the entire property. So, in the example above, when the parent dies, the two children become TIC with each other. This means that they each own the entire property together, and both children must agree on whether to sale, rent, or use the property as collateral. In a perfect world, the two children will always agree and be on the same page when managing the property. However, we live in a vastly imperfect world where it is difficult for anyone to agree on anything, especially siblings! Most parents know their children better than the children know themselves. So, if a parent knows that their children struggle to manage a baseball card collection together, it may not be the best idea to leave the children a property to manage together. Here, is where a proper estate plan can come up with strategies to relieve any future disagreement between siblings.
The next type of ownership is joint tenants with rights of survivorship (JTWROS). This type of ownership is similar to TIC, but with one additional feature, the right of survivorship. The right of survivorship, like the name infers, gives the survivor the whole interest in the property once the other joint tenants pass away. For example, if two friends buy a property together as JTWROS, while both friends are living, they must both agree on selling, renting, or using the property as collateral. But, when the first friend passes away, the first friend’s heirs do not get any interest in the property. Instead, the first friend’s interest is transferred automatically to the surviving friend, and now the surviving friend owns the property as a sole owner. JTWROS is useful in many different situations and is another great tool to build your estate plan.
“But I am married, when I die the house goes to my spouse, right?” This is a common question that I hear. The answer, like all questions in the legal world, is that it depends. More specifically, when it comes to real estate, it depends on how and when the real property came into ownership. In North Carolina, tenants by the entirety (TBE) is a special form of ownership for spouses. TBE works just like JTWROS, in that TBE has the right of survivorship feature. So, if you and your spouse purchase a property together, then at the death of the first spouse, the property will automatically transfer to the surviving spouse.
“But what if we bought the property a month before we actually got married?” Well for the property to be TBE, you must have been married at the time of purchase. If you were not married, at the time of purchase, then you bought the property as TIC and without the right of survivorship feature. That means that the deceased spouse’s interest will pass according to their estate plan. If the deceased spouse does not have an estate plan, the laws of intestate succession will dictate how the interest in the house is distributed. Therefore, the possibility exists that the surviving spouse just became TIC with their in-laws or children! If that is a situation you want to avoid, then please come see me about ways we can prevent this unintended consequence from happening.