Last week, we started our discussion about deeds, which are often one page documents, 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. This week we continue that discussion.
Our series about deeds will include discussions about the different types of deeds, the general elements of a deed, the different types of deed ownership and use 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, we discussed different types of deeds. In today’s column, we will cover the different types of ownership and use interests.
There are a variety of ways in which you can have an ownership or use interest in property depending mainly upon when and how you are going to enjoy the use of that property. The most common interests I see are: fee interest, life estate, remainder interest, transfer on death interest, mineral interest and easement interest.
Fee interest. When you bought your home, you probably received a fee interest. A fee interest is generally a complete interest in the entire property. You get to use the whole thing immediately 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 do what you want with the property and can sell it to anyone you want, at any time.
Life Estate. On the other hand, if you own a life estate, you typically only have the exclusive right to use the property during your lifetime. You, as the life estate holder, usually have some duties and obligations. As the exclusive holder of that property, you cannot 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 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. Upon your death, the life estate interest ceases.
Remainder Interest. 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 right to use or occupy the property during the lifetime of the life estate holder. However, if the life estate holder does not maintain the property or causes the property to deteriorate, you may have a claim against the life estate holder. You could compel him or her to take care of the property. However, this generally has to be done through the court system with a lawsuit.
Fee Interest vs. Life Estate/Remainder Interest. 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 interest. If you have deeded your property to your kids, but kept a life estate and wanted to sell the property, you could not sell your property unless the kids, and maybe even the wives of the male kids, also sign off.
The kids would also be entitled to 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 age of the life estate holder.
Also if you deeded your property to your kids, but kept a life estate, you have made a present gift. 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. The divestment would create a penalty period, during which Medicaid would not cover your nursing home care. Similarly with a transfer of your property to the kids with a fee interest. It is considered a gift on the date of the delivery of the deed.
Transfer on Death Interest. One type of remainder interest is a transfer on death interest. When you transfer property to the kids with this type of deed, the property transfers to the kids as remainder persons only upon your death. The kids have no interest at all during your lifetime. You are in complete control of the property and continue to have a fee interest during your lifetime.
A transfer on death interest is kind of like a beneficiary designation for your property. You can sell, mortgage or transfer the property or change the remainder person at any time, and without the consent of the remainder persons. The transfer on death deed that I often use is what is called a ladybird deed. 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.
Mineral Interest. If you have a mineral interest in property, you only have the right to enter the property to extract minerals from the property. You do not own the property or have the right to use the property for any other purposes. The type of mineral deed that I see most often is for oil and gas interests. I have also seen sand, gravel and salt mineral deeds. If you have a mineral interest in property, you have to renew your interest every so often, or the interest expires and the mineral rights go back to the property owner.
Easement Interest. When you have an easement interest in property, you have a type of interest in which you have a right to use property owned by others. With an easement interest, you generally have the right to cross over the property of another. The most common easements I see are utility, public roadway and pipeline easements. You can also have private easements between individuals. For example, if your property is land locked, you may have an easement over your neighbor’s property to reach the road.
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 do-it-yourself deed.
By: Matthew M. Wallace, CPA, JD
Published edited February 17, 2013 in The Times Herald newspaper, Port Huron, Michigan as: Planning Matters: Deed ownership interests can be bewildering