Benjamin Franklin opined that “in this world nothing can be said to be certain except death and taxes.” Estate planning attorneys can add dealing with real estate and difficult clients to their list of certainties. Most estate planning attorneys agree that a client’s two biggest assets are their home and an Individual Retirement Account / retirement plan. Because real estate plays a role in even relatively modest estates, an estate planning practitioner needs to consider all issues regarding the real estate and its transfer. For example, title insurance may not be the first thought when dealing with real estate; however, as the fact pattern below illustrates, it absolutely needs to be part of a comprehensive estate plan involving real estate. Title insurance allows an owner to pass clear title to a successor owner of that property. Query what happens when the original owners, through their own neglect, or inexperienced attorneys through careless acts or oversight, cause the property to lose the protection of title insurance. Let’s review facts of a hypothetical situation involving familiar characters, patterned after a recent Montana case in which exactly this occurred.
After graduating from RD High, Betty and Veronica purchased a home as joint tenants with rights of survivorship. As part of the purchase process, they obtained title insurance. The policy named Betty and Veronica as the insureds and among other things, covered against loss or damage from lack of right of access to and from the property and had continuing coverage so long as “the insured retains an estate or interest in the land…” Several years pass and realizing that they have become quite wealthy, Betty and Veronica consult with their estate planning attorney, Josie. On Josie’s advice, Betty and Veronica create irrevocable trusts naming Betty as trustee of both trusts. Josie, overtired from a late-night gig, drafts quitclaim deeds transferring each of Betty and Veronica’s ½ interest in their home to their respective trusts. Josie’s quitclaim deeds contain standard language that the “deed releases all interest acquired by the Grantor in and to the subject property from the date hereof through and including the date of recording said deed.” Shortly after the deeds were recorded, Betty and Veronica died in a tragic car crash. Reggie, in his capacity as successor trustee of the trusts transferred the property by Trustee’s Deed to Archie and Jughead. When Archie and Jughead discovered that they couldn’t access the property, they submitted a claim to the title insurance company seeking redress for lack of access to the property. The title company denied the claim finding that Archie and Jughead were not insured individuals under the policy under any legal theory. The title company asserted that when Betty and Veronica transferred their home to the trusts via quitclaim deed, their coverage under the policy terminated. Thus, when Reggie transferred the property to Archie and Jughead, the property was not covered by title insurance. Archie and Jughead sued the title company but lost in court because the presiding judge agreed with the title company’s argument that the transfer via quitclaim deed lacked the necessary warranties and covenants of title to allow Archie and Jughead to make a claim against the policy.
The fact pattern above represents yet another estate planning cautionary tale. Unfortunately, this tale was completely avoidable. Had Josie exercised slightly more caution when drafting the original deeds of transfer to the trust, she could have saved Archie and Jughead quite a headache. If Josie had used warranty deeds to transfer the property to the trust, then Archie and Jughead would have had the protections of the warranties and covenants under the deed and likely, would have been able to make a claim against the title insurance when they could not access the property. Alternately, had Josie advised Betty and Veronica to update their policy, or obtain a new title insurance policy, upon the transfer of the property to their trusts, then the case would have likely had a different result.
As this example makes clear, the parties had options to avoid this undesired outcome. By transferring their interests pursuant to quitclaim deed, Betty and Veronica lost the protections of their title insurance because they no longer owned the property. Yes, trust beneficiaries have an equitable interest in the trust assets while the trustee maintains legal title; however, those facts do not equal retaining an interest in the property which was necessary to maintain coverage under the insurance policy at issue. Even if Josie insisted on using quitclaim deeds rather than warranty deeds, she should have advised Betty and Veronica to update their title insurance policy, thereby helping them maintain their title insurance on the property.
Many estate planning attorneys build plans around trusts. After all, use of trusts conveys many benefits to the grantor and beneficiary by protecting the assets after the death of the grantor and by limiting the beneficiary’s use of the property in addition to the many other benefits that trusts provide. While attorneys focus on the provisions of the trust in creating a plan, it’s also important that attorneys expand their focus. Diligent attorneys should exercise caution when drafting deeds incident to transferring the property and advise the clients to update their title insurance policy, if appropriate. Sometimes, a title insurance policy provides coverage for a transfer to the insured’s revocable trust. If the title insurance doesn’t cover a transfer to the insured’s revocable trust, as was the case in the Montana case, a warranty deed could extend the title insurance coverage. A quitclaim deed provides no guarantee or warranty to the recipient. However, by using a warranty deed, the recipient can claim against the transferor under the warranty and then the transferor can claim under the title insurance. Regardless of whether the real estate will be used as the family home, a vacation home, or even an investment property, the Betty and Veronica example demonstrates the importance of checking the title insurance and, if it doesn’t extend coverage, using a warranty deed or obtaining a new title insurance policy.
Tereina Stidd, J.D., LL.M. (Tax)
Associate Director of Education
American Academy of Estate Planning Attorneys, Inc.
9444 Balboa Avenue, Suite 300
San Diego, California 92123
Phone: (858) 453-2128