Last week, we started the discussion about deeds and how little changes in a few words can make a huge difference in the interest you receive in real estate. You may not be getting what you thought you were getting because of the words that were used.
As I have previously stated, any discussion about deeds must include a discussion about the different types of deeds, the general elements of a deed, the different types of deed ownership interests and if you have multiple owners of the property, a description of the rights of each of the owners. In last week’s column, I discussed different types of deeds. In today’s column, we will cover the different types of ownership interests.
There are a number of ways in which you can have an ownership interest in property depending upon when you are going to enjoy the use of that property. The most common interests are: 1) fee interest, 2) life estate, 3) remainder interest, and 4) transfer on death/beneficiary interest.
When you bought your home, you probably received a fee interest. A fee interest is generally a complete interest in the property. You get to use the whole thing and when you are done with it, you get to sell the whole thing. This is the most common type of ownership for homeowners. You can sell the property to anyone you want at any time.
On the other hand, as a life estate holder, you typically only have the exclusive right to use the property during your lifetime. You, as the life estate holder, do have some duties and obligations. As the exclusive holder of that property, you can not cause the property to deteriorate during the period in which you are the life estate holder. You are generally responsible for maintaining and insuring the property, paying property taxes, paying all utilities, etc. Although you have the right to use the property during your lifetime you must protect and preserve the property for the remainder person who will receive the property after your lifetime.
If you hold a remainder interest, you usually have to wait for the life estate holder to die before you get the property. You would generally have no interest in and have no right to the property during the lifetime of the life estate holder. However, if the life estate holder is not maintaining the property and causing the property to deteriorate, you may have recourse against the life estate holder. You could force them to take care of the property. However, this generally has to be done through the court system with a lawsuit.
One key difference between a fee interest and life estate or remainder interest is that with a life estate or remainder interest you can’t sell a complete interest in the property without the consent of the other. If you have a life estate and wanted to sell the property, you could sell nothing more than your life estate unless the remainder person also signs off.
If the remainder person signs off, you both would receive a portion of the proceeds of the sale, calculated based upon your life expectancy as life estate holder. There are life expectancy and other published tables which are used to determine values of life estates and remainder interests based upon the ages of the estate holders.
One type of remainder interest is a transfer on death/beneficiary interest. With this type of interest, you as remainder person have no interest at all during your lifetime and the property vests or transfers to you only upon the death of the original owner who retains a life estate interest. The transfer on death deed that I often use is what is called a ladybird deed. With a ladybird deed, there is no current transfer of a vested interest like there is in a fee, life estate or remainder interest.
For example, if you deeded your property to your children but reserved a life estate for yourself, you have transferred a remainder interest which is a present gift of a future interest. The value of that gift can be calculated and is considered a divestment for Medicaid purposes in the event that you needed Medicaid to cover your nursing home care within five years of that transfer. Similarly with a fee interest, the transfer is considered a gift on the date of the delivery of the deed.
Not only are there dividing issues, if you deeded your property to your children and reserved a life estate, and then you wanted to sell your home, you couldn’t unless every one of your children you put on the deed also signed off. You may also need the signatures of the wives of your male children just so you can sell your home.
On the other hand, if you use a ladybird deed to transfer your home to your children, they have no present interest in your home. If you want to sell it you can do so all by yourself without the need for getting the children to sign off.
Because the kids have no interest until after your death, the ladybird deed does not trigger divestment penalties if you applied for Medicaid to cover nursing home expenses within five years of the deed.
As you can see with deeds, these one page documents are not so simple after all. Trying to draft your own deed often results in another example of the Fram Oil Filter commercial, “Pay me now, or pay me a lot more later.” It is generally cheaper to pay an attorney to properly draft a deed than it is to hire an attorney later to fix a broken deed.
By Matthew M. Wallace, CPA, JD
Published edited August 08, 2010 in The Times Herald newspaper, Port Huron, Michigan as: Deed ownership interests can be bewildering