While an Estate is made up of the property that you own at the time of your death, many people fail to understand the difference between the types of property ownership. Property is classified by the terms “real” and “personal” but right now focus on the real property (aka real estate.) Real property can be a home but it also includes undeveloped land, a farm, and any structure attached to land. This concept is discussed in my Free Estate Planning Book
When it comes to real property (real estate) you will often see the term “Fee Simple” if you look at a deed to a property. It’s a term that dates back to 14th century and it pertains to an owner’s power to control his/her property during his life—sell it or otherwise transfer it. At the owner’s death, he can dispose of it “inter vivos” which means through his/her Last Will and Testament. If the owner doesn’t have a Will, his particular state government, through its law of intestacy, will direct which heir(s) receive his property.
The federal government usually doesn’t interfere with state governments on most matters pertaining to citizens within that state. The 10th Amendment to the United States Constitution specifically provides that powers not delegated to Federal government by the Constitution are reserved to individual states. The debate over the power of the federal government, despite the 10th Amendment (i.e. Commerce Clause, Necessary and Proper Clause) is, however, far beyond the scope of estate planning and not relevant to your understanding of estate basics.
There are different forms of ownership. If only one person owns the real estate, he/she is the sole owner. If, however, a person owns a property with others the law defines that form of ownership based on the relationship of the co-owners.
Tenancy by the Entireties
Tenancy by the Entireties is reserved exclusively for married couples which now include same sex couples in Pennsylvania. Under this form, the two individuals within the marriage each own 100% of the property and therefore neither can transfer it without the other’s consent. It’s also important to understand that a creditor (bank or other lender) can’t place a lien against the property based on the debt of only one person. For estate purposes, when either of these individuals passes away, the surviving member will absorb the other share and so it won’t pass through the deceased’s estate. In Pennsylvania, there is no inheritance tax between spouses. Tenancy by the Entireties is the only legal classification reserved for married couples and all other co-owners must be Tenants in Common or Joint Tenants with Right of Survivorship.
Tenants in Common
Tenants in Common is a form of ownership in which each member owns a specific percentage of the real property either equally or non-equally. When one of the co-owners dies, his/her share passes to his/her heirs and not to the surviving members. For example, if Joe, Bill, and Steve owned a house together and Steve died, Steve’s share (assuming 33.3) would pass to his heirs through his estate. The other members wouldn’t have a right to it. Under a Joint Tenancy, however, this is wouldn’t happen.
With joint tenancy, (sometimes called Joint Tenancy with the Right of Survivorship) the deceased member’s share would pass to the surviving members and not through his estate and to his heirs. Using the example above, Steve’s share would pass to Bill and Joe. Steve’s heirs wouldn’t receive any inheritance.
The different forms of real property ownership are important because they supersede any request made within your Last Will and Testament —you can’t give something that you don’t own. If you’re Will states that part of a property passes to an heir but the form of ownership is joint tenancy on the deed, the deed controls over the Will. In closing, if you aren’t sure how your real estate is titled (or “deeded”) it’s important to review your Deed and speak to your attorney regarding it. Understanding what you actually own and the type of ownership is critical to any type of estate planning.