This is another in a series of blogs on the basics of estate planning. This week, we’ll look at some considerations in funding real estate into a trust.
Funding real estate into a trust can be a great way to avoid probate, gain administrative flexibility, etc. However, funding real estate into a trust is not a complete no-brainer. It can lead to a number of issues and potential problems. Helping a client make the right decision regarding funding of real estate 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. In Part 2, I’ll look at taxation issues upon transfer to a revocable trust, as well as some asset protection issues. In Part 3, I’ll look at some issues specific to transfers to irrevocable trust, for example for Medicaid planning. Finally, in Part 4 I’ll look at various miscellaneous issues, such as Due on Sale Clauses, etc.
- Homeowners’ Insurance. This is one of those details you don’t want to overlook when funding real estate into a trust: you should contact the homeowner’s insurance company to notify them 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 the title insurance policy before making the transfer. Many title insurance companies include provisions in their policies extending title insurance coverage to transfers to revocable trusts. If the existing policy does not cover your situation, either because the policy doesn’t cover transfers to revocable trusts or because you’re transferring it to an irrevocable trust (for Medicaid or other reasons), you’ll want to take one of three steps to avoid leaving the property without title insurance:
- Buy a new policy.
- Buy an “additional insured” endorsement to the original policy.
- 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, 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. This type of deed may not be available in all states.
If the client does not want to proceed with any of the above options, have the client sign a letter stating that options you presented and that they chose just to go without title insurance. Of course, this is their choice. They may decide that the cost of title insurance is not worth the risk which may be minimal in their circumstances, especially if the property has been in their family for generations.
In Parts 2 through 4 of this series, I’ll continue to explore issues to consider when transferring real estate into a trust. In upcoming blogs, I’ll discuss more on other basics of estate planning.
Stephen C. Hartnett, J.D., LL.M.
Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128