We spend a lot of time stressing to our clients the importance of properly funding their trusts. But, which assets belong in a trust and which are best left titled in the client’s name?
When it comes to real estate, this can be a tricky decision. Funding real estate into a trust can lead to a number of issues and potential problems. Helping a client make the right decision means looking at a transfer from all angles before drafting a deed.
In this post, I’ll take a look at common insurance concerns you’ll want to be aware of. Next week, I’ll take a look at tax and asset protection concerns. In the third week, I’ll provide a brief overview of some additional issues to consider prior to transferring real estate into a trust.
- Homeowners’ Insurance. This is one of those details you don’t want to overlook when funding real estate into a trust: the homeowner’s insurance company will need to be notified that the property has changed hands. If the property serves as the grantor’s residence, or the residence of a beneficiary, that person should be named as an “additional insured.” Typically, there is no change in the premium as a result of this change.
- Title Insurance. Check with the title insurance company before making the transfer. Many title insurance companies now include provisions in their policies that extend title insurance coverage to transfers to revocable trusts. If this coverage is not available in your situation, you’ll want to take one of three steps to avoid leaving the property without title insurance:
- 1. Buy a new policy
- 2. Buy an “additional insured” endorsement to the original policy.
- 3. Use a warranty deed, rather than a quitclaim deed, to transfer title to the property. When you use a quitclaim deed to transfer property to a trust, the deed merely serves to transfer whatever interest the grantor had in the property – if any. With a warranty deed, however, the recipient gets extra protection. The grantor warrants that he or she has clear title to the property. Therefore, if there is a problem with the title, the trustee of the trust could make a claim against the transferor, i.e., the grantor of the trust. If the grantor’s title insurance covers the claim, the coverage should not be denied because of the transfer to the trust.
Stephen C. Hartnett, J.D., LL.M.
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (800) 846-1555