Q. My wife and I created a Living Trust some years ago and put our home in our trust. I recall hearing something on the radio recently about making sure that the transfer into our trust did not void our title insurance. Do you know anything about this?
A. Yes. You refer to the concern that the transfer of ownership of your home from you and your wife as individuals, to you and your wife as trustees, might nullify your title insurance coverage, depending upon the terms of your policy. To understand this problem, and the appropriate “fix”, a bit of background is helpful:
Title insurance is a policy of insurance issued to the buyer of real property to protect against defects in title, easement disputes, liens, right of access and the marketability of title. But in order to be covered you must remain a named “insured” under the policy.
When you and your wife bought the property years ago, you likely took title in your individual names. When you later created your Living Trust, you presumably transferred title to yourselves ”as trustees”. The legal issue is whether you and your wife, as trustees, are still the named insureds under the policy.
This very question was decided against the homeowners by a California court a few years ago in a case called Kwok vs Transnation Title Ins. Co. In that case, a couple created a Limited Liability Company (“LLC”) to acquire a piece of real property with the plan of constructing a home. Title insurance was issued at escrow closing in the name of the LLC. Subsequently, the couple created a Living Trust and transferred the property from their LLC into their trust. During construction, an easement dispute arose with their neighbor, and they turned to their title insurance company for help. The company denied coverage. It reasoned that the insured under the policy was the LLC, not the trustees of the Living Trust, even though the owners of each entity were the very same husband-and-wife. The Court agreed with the insurance company and upheld its denial of coverage.
Since then, many title companies have taken the position that a transfer of real property into a Living Trust nullifies the title insurance, especially with older policies.
In view of the above, I recommend the following: (1) Check your title insurance policy for the definition of “insured”. Make sure that it continues to cover you if you transfer your home into your Living Trust, and contact your title insurance company to verify your reading of the policy; (2) If you are concerned that it may not provide coverage, ask for a special endorsement to extend coverage to you and your wife, in your capacity as “trustees”. The cost, if any, should be nominal.
While it is unusual for title insurance problems to arise after purchase, yet if they do arise they can be very costly to resolve. Keep your title insurance in force. It takes only modest effort to either verify coverage on your existing policy or, if necessary, to purchase a special endorsement to preserve that coverage.