Title Insurance and Living Trusts

A living trust avoids the expense and delay of probate. And to make a trust effective, assets must be transferred to the trust. However, there is a potential problem property owners must watch out for: Title Insurance. This is difficult when they don’t know what title insurance is, or don’t realize they have it. What is Title Insurance anyway? Click here for more info.

So what is the problem? The problem is that a title insurance policy might not insure property once it is in a trust. And if so, the insurance company will not defend title claims brought against the property.

Why does this matter? A title claim without the protection of title insurance could be expensive for the owner or even cause the property to be lost. It depends entirely upon the wording of the title insurance policy and not upon the wording of the trust. No provision in the trust would make a difference.

How does this happen? Suppose John Smith owns a house. He later makes a trust and transfers it to his John Smith Trust. The house is now no longer titled to “John Smith” but to “John Smith, Trustee.” When John bought the house he also purchased title insurance which insured “John Smith.”

When is it an issue? Let’s imagine, unbeknown to John, there was a contractor’s lien against the house because a prior owner failed to pay a contractor for repairs. The contractor sues John as property owner to collect. Though John did not incur the debt, the property is liable because of the lien. John turns the claim over to his title insurance company for protection. His title insurance company sees that the house is in his trust and says, “Sorry John, you are on your own. We are not going to pay the lien. Our insurance covered only ‘John Smith’ and not ‘John Smith, Trustee’.” John says “you’ve got to be kidding. I paid the premium. I am the same person as John Smith, Trustee!!” The company says “but there is a legal difference between owning the property in your name and owning it in your name as trustee. The policy does not allow you to transfer the property to another person without our consent.”

Some title insurance policies consider “John Smith, Trustee” and “John Smith” as different people. Only one of them is insured, namely John Smith, but he no longer owns the house. So when a claim is brought against the property, the title company refuses to defend it because the owner they insured no longer owns the property. Does this seem fair?

What is the issue exactly and what should I do? The issue is whether your policy allows you to transfer your property to your trust without having to purchase an endorsement from the insurer. Not every title policy prohibits a transfer to the owner’s trust. It depends upon the wording of the policy. Discuss this with your title insurance company and find out what your policy allows.

If your title insurance policy does not cover real property in your trust, all is not lost. Provided there has been no claim against the property, the insurance company will issue an endorsement to cover the property in your trust. They generally charge $100.00 for an endorsement.

If you cannot find a policy, you still may be able to locate the title insurance company. Hopefully your title company is in business and easy to find. Look at the Grant Deed (not the deed of trust or deed of re-conveyance) you received when you bought the property. In the upper left hand corner is the name of a title company; it may have issued your policy or handled the recording of the deed. Contact that company.

Some major title insurance companies are:

First American Title Insurance Company
Fidelity National Financial
Stewart Title Insurance Guaranty
Old Republic Title Insurance Company
North American Title Insurance Company
Chicago Title Insurance Company

There are many smaller companies, but they can go out of business, merge, or be bought out. If you cannot find your title company, try an internet search. Or contact the California Department of Insurance (800-927-4357). They might have up to date information on the company.

If you have no policy, or cannot find the title insurance company, should you purchase title insurance? We cannot advise as to whether you should purchase title insurance. Contact a title insurance company and find out what a policy would cost. Title claims do not appear to be common. Also it would seem that many claims would arise early in ownership. Thus the length of time you have owned the property could be a factor in your decision as to whether you will buy.

What To Do Either Before Or After Signing Your Trust:

Locate your title insurance policy for the real estate. If you cannot find the policy, then locate the Grant Deed (the deed you received when you purchased the property). The name of the title insurance company will be on the upper left hand corner of the Grant Deed.
Contact the title insurance company.
Ask if your title insurance policy covers your real estate if it is transferred to a trust.
If it does not cover such a transfer, the title insurance company will issue a coverage endorsement (often called a 107.9 endorsement) but may charge you a fee.