[Farm Law editor’s note: the following piece is in draft pending academic peer review, and written as part of the series Farm Law: Owning, Managing and Transferring Farm Interests, sponsored by the North Carolina Tobacco Trust Fund Project # #583400-10363. Comments to rabrana2@ncsu.edu are welcome.]

Introduction

Essential to decisions concerning your resources for farm operation, forest management and legacy transfer planning is understanding the nature and extent of your ownership rights in the land and things available to you for disposal for personal and business use. The term title describes the scope of ownership of private property, and how one holds title to property impacts flexibility in how it is managed and used. Title determines whether property may serve as collateral for a loan, whether it can be leased to others, sold for gain, and gifted for charity or support, and devised or bequeathed for continuation of family wealth and legacy. Title is also your relationship to the value of the property, and thus the incentive to preserve and protect that value. In a sense, title is also descriptive of your responsibility for the liabilities it brings in its relationship to the public at large, because when people are injured by or on your property, your title may define your responsibility for their injury. 

Sometimes ownership is easy to discern, as when land is purchased in a traditional title insurance-backed real estate closing. Sometimes however, particularly with some inherited or gifted property, determination of ownership requires an extensive examination of the public record, and may have to be proven in court. 

The following narrative discusses the very basics of how property is classified and how title (ownership) to property is held, and the legal rights of disposition associated with that ownership. This discussion primarily concerns real property title passed to heirs as inheritance.

Classification of Property

Property is divided into two classes: real property and personal property. The legal nature of property determines a host of legal rights and responsibilities, particularly how one lays claim to its ownership and use. Whether an item of property is real property or personal property determines whether a transfer of that property requires written documentation. Also, knowing whether an item of personal property is a fixture to land determines the manner in which it is transferred (i.e. as part of the land). Rights in real and personal property are distributed differently under intestate succession laws. Finally, whether an item of property is classified as real or personal can have environmental liability implications for a landowner relative to a different party who may have caused environmental damage to land.

 Real property consists of the land, the airspace above the surface, and the subsurface (in Latin: cujus est solum, ejus est usque ad coelum et ad inferos [whose is the soil, his is even to the skies and to the depths below].  Real property title includes a host of interests associated with the surface of the land, including rights to use water (riparian rights), rights to harvest standing timber, leases to use and occupy, and air, surface and subsurface easement rights, all of which are severable (i.e. can be disposed of separately from the land itself to someone other than the title holder). 

All first-year law students are taught the analogy that title to a parcel of land is like a bundle of sticks, with each stick representing a separate and severable right, whereby each may be transferred in whole or part to join the bundle of sticks representing title to another parcel. Real property rights are said to “run with the land,” indifferent to who holds title at any given time, unless that is a qualification of the transfer. Consider this illustration:

Tract A is owned by Frank, who acquired it by purchase from Chester. At the time title was transferred from Chester to Frank, Tract A had intact its full bundle of rights. After purchase, Frank is approached by Dweezle, owner of adjacent Tract B, who needs to cross Tract A to get to the public right of way. One of Frank’s property rights (one of his “sticks”) is the “right of sole possession.” If he grants Dweezle the easement to cross his land, said right is severed and – at least for the strip of land under the easement – is now shared with Tract B. Unless the easement is qualified by Dweezle’s continued ownership of Tract B (i.e. terminates when Dweezle transfers Tract B to another), the severed right will remain with Tract B, even when Dweezle later sells Tract B to Ralph. When Ralph purchases Tract B, it now contains the shared stick with Tract A, the right to cross Tract A to reach the right of way.

If the grant of easement to Tract B was contingent on Dweezle’s ownership of Tract B, the shared right to sole possession would revert wholly to Tract A upon Dweezle’s sale to Ralph.

Title also includes a host of severable interests in the subsurface estate, including groundwater and minerals such as oil and gas, which can be further severed according to strata in the subsurface (i.e. one can acquire rights to minerals 100 feet down, an another can acquire the rights to minerals 200 feet down). As for the sky, in theory one’s title is limitless, though it may be invaded under commercial aviation regulation, and surface zoning restrictions may limit the height of structures built on the surface.

Real property also includes structures erected on the land, such as houses, fences, sheds and barns, and other improvements that are otherwise not transferable in their useful state once they have been removed from the land. Note that for certain improvements to the use of land, though anchored in place to take on the nature of fixtures, such items can be considered personal property, particularly when declared so by contract. Often, when land is rented by the owner to a commercial tenant – including a farmer – improvements fixed to the land, though considered real property, may generally be removed as “trade fixtures” by the departing tenant.

How one holds title in real property is referred at law as a tenancy, from the Latin word tenir, “to hold.”  The extent of one’s tenancy is called an estate, from the Old French estat, descriptive of a place relative to others. Your tenancy is how you presently possess or hold property, and your estate describes your tenancy rights relative to those of others, if any, whether held at the same time as you, or known to be held at a later time.

Personal property is everything that is not real property, such as cash, farm equipment and tools, livestock, nursery stock, cut timber, and household items like cars, jewelry, bank accounts, stocks and bonds. Personal property is that which can be transported, and in short, almost everything that is not land (unless affixed as described above). Personal property can be divided into tangible and intangible property. Tangible property possesses its value in its physical form, such as a gold bar, a cow, a tractor, or a gun. Intangible property is property whose intrinsic value you cannot physically touch but may be represented by some form of documentation, such as a contract right to receive income, ownership of an interest in a business entity (i.e. a share of company stock), or ownership of a trademark or patent.

Documentation of Real Property Ownership

The manner in which one acquires, possesses and disposes of property depends on its classification. For real property, as a preliminary matter, one cannot verbally transfer title or an enforceable real property interest. All legally-enforceable transfers of an interest in real property must be evidenced in writing under North Carolina’s Statute of Frauds.[10]  The statute of frauds is a relatively ancient common law concept adopted in England in 1677 to ensure that a court could not deprive a person of his land title based on false verbal testimony, and has long served the practical purpose of eliminating specious claims.[11] Likewise, no one can verbally make an enforceable promise to convey title to land at some point in the future. Any contract for sale of real property – i.e. a promise to convey title in the future – must be in writing.[12] Promises by family members that “one day this land will be yours” are mere sentiments, and unless followed by an actual conveyance in the future, are not enforceable or valid. For example, if a parent verbally promises to convey land to a child, unless such is done so by written and legally enforceable contract (or a writing a court will enforce as a contract) or deed, such verbal promise will not be sufficient to support a claim of title by the child should the parent change their mind. The statute of frauds also requires a writing to convey non-ownership use interests in land, including riparian rights, easements, leases in excess of three years, the right to harvest timber, and options to purchase the land or any interest therein at a future date.[13] (While no real property right can be conveyed without a written document, note that at common law, certain rights in real property can be lost (i.e. acquired by another) without a writing provided certain facts and circumstances – time and open occupation being factors – which must be provable in court; this is known as adverse possession, or “squatter’s rights in the common tongue).

Transfer by Gift or Sale. Ownership or title to real property is transferred during an owner’s lifetime by deed (i.e. a writing) in proper form as prescribed by state statute.[14]  A deed is required whether or not the owner transfers title by sale or gift (i.e. receives no compensation). Deeds to real property must always be recorded in the county where the land is located to establish a claim superior to all others. The deed of title or interest is recorded with the county Register (sometimes Registrar) of Deeds in which the land lies. If a tract of land is bisected by a county line, the deed conveying title or other interest must be recorded in both counties.[15] The primary purpose of recording instruments of transfer is to secure those rights relative to other claims in the same property, and provide a public record for definitively establishing such claims. In effect, as per the above illustration of severable property rights, definitively establishing which sticks are actually in the bundle. In the modern era, all 100 North Carolina counties have deed registrations digitized and searchable online back to a certain date, depending on the county.

Transfer Upon Testacy (by Will). Upon an owner’s death, his or her interest in real property vests immediately in his or her legatees (testate) or heirs (intestate) at law.[16] Such death-time transfers do not often produce a recorded deed in the chain of title for a tract of real property. When an owner of real property has executed a valid will prior to their death, their interest passes immediately by devise to one or more heirs named individually (“to my daughter Jill”) or identified by class (i.e. “to my children”). When title passes via will, a deed of transfer is rarely executed, though an executor may record a “will abstract” with the county register of deeds to indicate the title distribution and mark it in the chain of title for that parcel real property. Though not required to transfer title, an executor may also execute an “executor’s deed” confirming the conveyance of title to heirs. In most cases, when discerning title to inherited real property, one must locate the will in the Estates Division of the county Clerk of Court’s office, where the will has been submitted to the probate process. A review of the will confirms who the legatees are, and thus who now holds title. Sometimes, a will may devise property specifically to the executor coupled with a power of sale, who may then sell the property and divide the proceeds. The will may specifically bequeath the proceeds of sale to heirs, or the proceeds are distributed to heirs as personal property of the residual estate. 

Transfer Upon Intestacy. When no will exists or can be found or for some reason is not admitted to probate, real (and personal) property interests pass to heirs by intestacy under the North Carolina Intestate Succession Act.[17] That statute provides various formulae for the succession of title to property by its class (i.e. real or personal) depending on the survivorship of a spouse and various classes of lineal and lateral descendants. Discerning title to real property that has transferred by intestacy can be a challenge when no probate proceeding was opened and property appointed by the clerk of court.

Evidence and Documentation of Personal Property Ownership

Documentation of personal property is by statute, documentation of a transaction, or whim. Outside of titling of personal property required by law, such as an over-the-road vehicle or a mobile home, most personal property ownership documentation takes the form of a receipt upon purchase of the property. When personal property is gifted, it is best practice to draw up a “bill of sale” even though no money changes hands, simply to provide some evidence of ownership in the transferee (ie. evidence the original owner intended to relinquish the property to the transferee). A lawsuit to claim (quiet) title to an item of personal property is allowed by declaratory judgement action in equity.

Transfer by Will. In North Carolina, ownership of personal property – when acquired at the death of the previous owner – vests immediately in the heirs at law subject to the appointment of the executor for the estate. The executor (also called “personal representative”) then becomes the legal owner and possessor of personal property until such time as assets are distributed through the probate process.[18]  If tangible or intangible personal property has been specifically bequeathed in a will to an individual, that individual will take distribution certified to the Clerk (and thus the public at large) by the executor of the estate. For inherited personal property, ownership is often described by class, such as “I bequeath all of my personal property to my spouse” or “I bequeath all of my farm equipment to my son.”  When tangible and intangible property is bequeathed to a class of heirs (i.e. one or more individuals) who will share in the particular item of property. Intangible property — such as stocks, bonds, rights of income — can eventually be reduced to fungible property (i.e. cash) which is simply divided among heirs. For tangible items, some manner of post distribution agreement is necessary, and can sometimes be difficult between heirs. The record of transfer in a probated estate – i.e. a court-supervised testate or intestate settlement of a decedent’s estate – will indicate and be proof of ownership of that item.

Transfer by Intestacy. For tangible personal property acquired from an intestate decedent whose estate “distribution” was not supervised by the court, there may be no record of ownership and ownership may be more difficult to determine in the event two people claim the same item. In that event, the old saying that “possession is nine-tenths of the law” is not too far from the mark, but normally personal property is identified to the owner of the location where it is found. Without sufficient documentation valid on its face, proving ownership to property that is in the possession of another requires some measure of ancillary documentation and other evidence. Ownership of both tangible and intangible personal property may be shown by automobile titles, receipts, contracts, bills of sale, bank records, stock certificates, etc. Without these documents, ownership of personal property may be difficult to prove when in possession of another. In many cases, particularly for tangible items, possession of personal property may count as proof of ownership, or at least making ownership harder to disprove by another claiming that property.

How Real Property is Titled

The following discussion concerns the status and rights associated with various forms of title to real property.

Sole ownership. Sole ownership is the simplest form of property ownership, where one person has all present and future power to use, control, sell or otherwise dispose of the property. If you are the only owner, you may transfer the entire property by sale, by gift, or under the terms of your will. You may also place your entire interest in a trust. As noted above, you may sever and dispose of various real property interests to third parties – so long as such rights were in your bundle of sticks – such as the right to surface use (e.g. farming), the right to draw water, the right to cross the surface of the land, and the right to harvest timber. However, remember that even a sole owner only possesses those rights that were vested in the previous owner at the time of transfer of the real property, unless he has reacquired them. Consider the following example:

George as grantor conveys title to a tract of real property (“the farm”) to his neighbor, John. George acquired his land from his father, Paul. Before Paul conveyed the farm to George, he conveyed the exclusive right to harvest timber from the land to another neighbor, Ringo. George’s “bundle of sticks,” specifically his right to harvest timber off the property, was already compromised upon his receipt of title to the farm.

Now suppose that Paul’s transfer of timber rights (including access to cut) was time-limited to three years from the date of transfer, and Ringo fails to exercise or act on this right within the three years. At the close of three years, this “stick” is returned to John’s bundle of rights.

Consecutive Interests:  The Life Estate. The concept of consecutive interests describes title held in a series, where one person’s ownership begins at the termination of the previous owner’s estate. Such rights (i.e. possession) are never held at the same time. The common law concept of consecutive interests is distinguished from the succession of title by inheritance at the death of the previous owner, where such succession must be established by a testamentary instrument or statute based on blood relation. Consecutive interests are a series of interests that are created in a single moment, and in that moment are known to occur at a point certain. The interest of the “successor,” called a remainderman, is vested at the time the consecutive (remainder) interest is created; because death is a certainty, the first owner will die, and the remainder possessory interest will immediately come into being. The most common expression of this concept is known as the “life estate.” 

A life estate is a transfer of title to real property to a person whose title takes effect at the death of the grantor. One who creates a life estate is called the life tenant. The life tenant has the right to possess and use the property for their life or (more rarely) the life of another specified person. The life tenant’s estate ends upon the death of that person, whereupon the right of possession vests in the person who is the grantee of the property. This person (or several) is the “remainderman.”  Life estates are commonly created in the moment by deed, where the grantor (often a parent or parents) grants a deed to another (i.e. the child or children) with the language “subject to a life estate retained by the Grantor herein.”  The recording of the deed indicates that at a point certain in the future, the Grantee will receive full title to the property, because death of the Grantor is a biological and legal certainty. Such transfer may not be undone absent the reconveyance (or joining in conveyance to another) by the Grantee. A remainderman’s interest is not an inheritance, and the vesting of the remainderman’s possessory interest is in no way affected by the life tenant’s will or the distribution laws of intestacy. Consider this scenario:

Kevin, owner of Tract A, executes a deed as Grantor to his friend, Peter, as Grantee. In the deed, Kevin writes: “Grantor conveys to Grantee his interest in Tract A, subject to a life estate in the Grantor (or in favor of Grantor, or subject to the lifetime of the Grantor)”. This deed upon recording has the immediate effect of vesting a remainder interest in Peter, whose possessory interest will vest immediately upon Kevin’s death.

Life estates can also be created by inheritance, but virtue of language in a will. A testator (i.e. one who dies with a will) may have written a devise of real property to create a life tenancy in an heir, with another as remainderman. For example, a testator may write “I, George, devise my farm (adequately described) to my son James for his lifetime, then to his son John.”  The effect will be that, when George dies, James inherits a lifetime interest in the farm, and when James dies, John will receive the farm outright. Once George dies, and absent John’s consent otherwise, he is certain to receive title to the farm at some point in the near or distant future. Of course, neither James’ nor John’s interests are vested while George is alive, because while George is alive his will has no legal effect to transfer property of any kind.

Usually, the life tenant has the following rights and duties, unless the document creating the life estate shows a contrary intent. 

• The life tenant may only sell his or her interest in the property. The purchaser buys only the right to use and possess the property for the lifetime of the seller, or other life tenant specified in the original deed. 

• The life tenant has the right to plant, harvest and sell annual crops. The life tenant does not have the right to open new mines or quarries, but can receive their incomes and profits.

• The life tenant is entitled to cut and use a reasonable amount of timber needed for fuel or to repair buildings or fences and the like. However, the life tenant may not cut timber from the land merely for his own profit is limited, and often will require agreement of the remaindermen. Timber disputes on life-estate property are not uncommon, whereby the parents may want to cut timber for income, but the children want it preserved for their own income needs later.

• Absent an agreement to the contrary, if the property produces income, rents or profits, such as a farm or commercial building, the life tenant may collect the rents and profits from the property. 

• The life tenant is responsible for taking care of the property and for making ordinary repairs, and must pay property taxes and local assessments. If the property is mortgaged when it comes to the life tenant, the life tenant is responsible for paying the annual interest on the debt, but not the principal. 

• Transferring fee title to the land itself – complete ownership of the interests in the land – requires both the life tenant and all the remaindermen to sign the deed. 

• The life tenant cannot bequeath the property under the terms of a will.

An example of words in a will or deed that create a life estate can be “to my wife for so long as she lives, remainder to my nephew, James.” The wife has the right to possess and use the property for her lifetime, and upon her death, the property passes to Jane as the sole owner. 

Although it is easy to create a life estate, it cannot be undone absent the consent (by new deed) of the remaindermen. Furthermore, it is still part of your taxable estate for federal estate tax purposes.

Concurrent Interests

If you have inherited real property along with your siblings or others, you own a concurrent interest in the property along with the others. Concurrent ownership means your rights and the rights of other owners occur at the same time. Your rights in the property depend upon the form of joint ownership, and often how it was acquired. Concurrent joint ownership of property takes one of three general forms: tenancy in common, joint tenancy with a right of survivorship, or tenancy by the entireties. Only tenancy in common permits your interest in the property to pass under the terms of your will. 

Tenancy in common. A tenancy in common means that two or more people own an undivided fractional interest in the same piece of property. This is probably the most form of land ownership for inherited land in families with more than one child. For example, if three children inherited property from a parent “to share and share alike,” they own the property equally as tenants in common, each owns an undivided one-third interest in the entire property, not a specific portion of it. Each co-owner has the right to use and possess the whole property, but each co-owner cannot exclude another co-owner. 

None of the owners in co-tenancy may take any action with respect to the whole property without the written permission of the others. The agreement of all three is required to sell, lease, gift, or mortgage. Absent an agreement to the contrary, all co-tenants share equally in the income and rents produced by the property. For example, a deed signed by one owner does not transfer interest in the entire property, only their percentage ownership (and again, not to a specific part of the property). The new owner owns it along side the other tenants. Likewise, a lease to the entire property signed by one owner is likely unenforceable if the other owners do not also sign it.

Any co-tenant can ask a court to order a partition to the property. The court may be able to divide the property and give each co-owner a proportionate interest. On the other hand, if the property is not easily partitioned – usually the case with land of varying attributes such as crop land, water, woodlands and road frontage – the court can order a sale of the whole property. The proceeds of the sale are divided according to each co-tenant’s interest.

Ownership shares in a tenancy in common can be unequal. This can happen when one of the co-owners dies and his or her heirs inherit their interest.

Consider this Example:  Brothers, Richard and James, inherited a tract of forest land from their mother who owned it as sole owner. Each owns a fifty percent undivided interest. Richard dies with a will that leaves his property to his five children to “share and share alike” whereupon his share is bequeathed equally to his five children. James still owns a fifty percent undivided interest, but now his nieces and nephews are his new co-owners, who each own a ten percent undivided interest in the property.  

Then James dies, leaving his undivided interest to his two children. Each of his children owns a twenty-five percent undivided interest, but there are now seven owners to the land. To sell the entire tract, or even lease it or timber it (absent an agreement otherwise) the seven cousins must agree to the transaction. James’ children have no greater authority simply because they own a larger interest. Further, any cousin may choose to sell his or her individual interest to a willing purchaser. If any one of the cousins dies, his or her interest will continue to pass to his or her heirs, and there may be more co-owners, now of differing generations.

The value of a co-owner’s undivided interest is included in his or her gross estate for federal estate tax purposes and may be subject to federal and state estate taxes. The value of the interest is measured by the fair market value of the property multiplied by their percentage interest, although a discount may be allowed if there are more than a few owners.

Joint tenancy with right of survivorship. Two or more persons may own property as joint tenants with right of survivorship. This is common for bank accounts, certificates of deposit and stock certificates, particularly where an elderly parent wishes these interests to pass outside of probate, or they wish to have their money – in the case of a bank account – readily accessible by a chosen child to immediately handle matters following their death. Real property may also be owned jointly with a right of survivorship. To create a joint tenancy with right of survivorship, the document of title – say a deed – must expressly say the property is held with the survivorship right (the absence of such language simply creates a co-tenancy). However, this is no longer common outside of marriage (see below). 

Upon the death of a joint tenant, in a joint tenancy with right of survivorship, the entire property automatically passes to the surviving joint tenant or tenants, and does not pass in the deceased owner’s will or by intestacy. Consider this example:

Laura is a widow with two children, Caroline and Elizabeth. Laura is getting older and becoming concerned that she may forget to pay her bills. Laura goes to the bank with her youngest daughter, Caroline, and converts her account to a joint survivorship account, thus giving legal authority to Caroline to write checks and make deposits on her account. 

The creator of a joint bank account should be careful to consider his or her other wishes as to the distribution of other property. Continuing the above example: 

Laura had inherited two separate parcels of land from her father, and in her will she has directed that one parcel go to Caroline, the other to Elizabeth. Laura is made an attractive offer by the tenant on the parcel designated for Elizabeth, and decides to sell it to him. She then deposits the sale proceeds in the joint bank account. When Laura dies, Caroline becomes sole owner of the sale proceeds, and still inherits the other parcel through the will. Caroline likely has no legal obligation to share the money with Elizabeth. Such a situation could likely spawn litigation between Caroline and Elizabeth, which is probably not what Laura would want.

Tenancy by the entirety. Joint tenancy, as described above, is generally how property acquired by a husband and wife is titled. If the document of title conveys the land to a husband and wife, modern real property law presumes that a tenancy by the entirety is created, unless the deed specifically states otherwise. In most circumstances, if the deed simply names the two married individuals, they take title with the right of survivorship. 

Only a husband and wife may own real property as tenants by the entirety. Under the law, each spouse owns the entire interest in the property, but neither spouse may sell, lease or mortgage the property without the written consent of the other. Divorce automatically ends a tenancy by the entirety, and the property is then owned by the ex-spouses as tenants-in-common.Property acquired by an unmarried couple is held as tenants-in-common, but their subsequent marriage does not automatically convert the property to tenancy by the entirities. The newly married couple must execute a deed changing the legal ownership nature of the property.

Creditors cannot take property held as tenants by the entirety for payment of a debt that is owed by only one spouse. Therefore, it is often advisable that one spouse not make the other a co-owner in a business entity operated by only the one spouse. This helps insulate the land held by the married couple from the creditors on the business entity.

Upon the death of one spouse, the surviving spouse automatically owns the property. The property is not transferred by the will of the deceased spouse and is not probated in the deceased spouse’s estate. 

Example:  Husband and wife own a farm, and have two children. The couple separate, but do not file for divorce, and the children have become estranged from their mother. During the separation, the children convince their father to execute a new will, leaving them his interest in the farm. The father dies, and the children triumphantly present their mother with a copy of his will. The mother consults a knowledgeable lawyer, who simple tells her, “It doesn’t matter:  the moment your husband died, you became 100% owner of the farm, there is no interest in the farm for your children to inherit.” 

Conclusion

As you can see, the way you own your property affects your rights to use, manage, sell or direct its distribution after your death. Automatic survivorship takes precedence over what is written in your will, and a carefully designed estate plan can be defeated if you fail to consider how your property is owned when you make certain decisions about its disposition. There may be times in your planning process that it is advisable to change the form of ownership to achieve farm transfer planning goals. Your lawyer will be able to determine how you own your property by looking up the deeds or otherwise knowing how and when you inherited it. It is not necessary to go into the lawyer’s office with deeds in hand. It is usually enough to inform him or her of the counties where you think you own land, and he or she can do the rest. Hopefully, your lawyer will follow the wisdom of Dr. Neil Harl of Iowa State University, who cautions in his multi-tome treatment of agricultural law:  “You should never take your client’s word that the farm is in their name alone.”

Acknowledgements

Content loaded to Agricultural and Natural Resource Law portal, including narratives, workbooks and presentations, is supported by The North Carolina Tobacco Trust Fund Commission (TTFC) (Grant award 2019-001-16), titled “An Heirs Guide to Farmland”).