Estate planning attorneys regularly advise their clients about the tax and other advantages of transferring real property to revocable trusts or similar estate planning vehicles. But they may not consider the potentially disastrous title insurance implications of such transfers. The original property owners may have had coverage under their policy, but—depending on the type of policy—once the property is transferred to the estate planning entity, the entity (i.e. trustee of the trust) isn’t the “insured” anymore and coverage could be lost.
The consequences of losing otherwise valid title insurance coverage can be significant. Covered matters include such things as lack of a right of access, unmarketability of title, defects, liens or encumbrances on the title, and the like. These are all serious and often expensive matters to resolve.
The case of Kwok v Transnation Title Ins. Co. (2009) 170 CA4th 1562 illustrates the conundrum faced by the (no longer) insureds who found themselves in an easement dispute with their neighbors. Although they may have had a valid claim under their title insurance policy, they had transferred title to their property from their limited liability company (the named “insured” under the policy) to a revocable trust. The insureds unsuccessfully argued that the transfer only effected a change in the method of holding legal title, not a change in their proportional beneficial interest. Focusing on the definition of insured in the policy, the court was not persuaded:
…the issue before us is not whether there was a change in the beneficial ownership of the property, but rather whether appellants, as trustees of their family trust, succeeded as insureds under the terms of the policy. There is nothing in the policy definition of “insureds” that identifies “beneficial owners” as insureds. Under the terms of the policy, appellants could only become insureds by operation of law. The transfer of property by an insured into a family trust is a voluntary act and not one that arises by operation of law. [emphasis added.]
There are some steps an estate planning attorney can take to avoid this title insurance nightmare:
- Ask the client for a copy of the title insurance policy to make sure it defines “insured” to include estate planning entities.
- If the policy has a narrower definition of insured, contact the title insurance company and obtain an Additional Insured endorsement (CLTA 107.10).
The Homeowner’s Policy of Title Insurance, adopted in 1998 and currently the default policy under the California Association of Realtors contract, specifically includes transfers to estate planning entities as an event that does not terminate coverage (Conditions 2 b Continuation of Coverage). By contrast, the CLTA Standard Coverage Policy (the policy issued to the majority of homeowners before 1998) doesn’t include estate planning entities as an insured. The Kwoks had a CLTA Standard Coverage Policy.
If your client has a policy that doesn’t include coverage that continues after transfer to an estate planning entity, the Additional Insured endorsement will ensure that the title insurance policy doesn’t lapse when there’s simply a conveyance of real property into a trust or other estate planning entity. There’s no distinction between revocable and irrevocable trusts with regard to coverage, except that for revocable trusts an individual can revoke to regain coverage.
If your client can’t find a copy of the policy (estate planning may occur decades after the purchase of the property), a review of the deed may offer a clue as to the insurer. At the top of the deed, the title insurer or its underwritten agent is generally listed as the entity requesting recordation of the deed. The deed of trust obtained at the time of purchase may also offer clues as to the insurer. For example, the title company may be named the trustee and then the estate planning attorney can contact the title company.
For more on coverage of title insurance policy forms, check out CEB’s California Title Insurance Practice, chapter 6. The definition of insured in a standard policy is discussed in §6.79. On property transfers to a trust, see CEB’s Complete Plans for Small and Mid-Size Estates §12.40 and Drafting California Revocable Trusts §21.9.
Other CEBblog™ posts you may find useful:
- Dispelling Some Misconceptions About Title Insurance
- The Mutual Obligations of Insurance
- The Gift That Keeps on Giving: Property Tax Information on Parent-Child Transfers May Reveal Unreported Gifts
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