Ownership of real property (i.e., land and the buildings affixed to the land) is generally evidenced by a deed, which is generally recorded on the land records in the city or town in which the property is located. When a grantor wishes to transfer real property to a living trust, a deed is prepared that names the trustee as the grantee of the property. While most transfers of real property are relatively straight-forward, there are some issues that should be given special consideration.
When you are transferring real property located in your state of domicile, there are a few issues to keep in mind.
Warranty Deed vs. Quitclaim Deed. The initial question that must be asked, when transferring real property located in your state of domicile, is what type of deed should be used. Chances are you received a warranty deed when you bought the property. Under a warranty deed, the seller warrants that he or she has good title to the property being sold and that he or she will defend your title and possession of the property. If you now transfer the property to the trustee of your revocable living trust by warranty deed, the integrity of the chain of title will remain intact and questions concerning title should not become an issue when the trustee ultimately sells the property.
Conversely, many grantors prefer to convey their real property to their living trusts by means of a quitclaim deed. With a quitclaim deed, the grantor gives no warranties or assurances whatsoever as to the type of interest he or she has in the property. Instead, a quitclaim deed merely passes to the trustee whatever interest the grantor has in the property. Of course, the grantor knows that he or she has good title to the property, but that is not the issue. The issue is what will a potential buyer think when he or she considers buying the property from the trustee.
This is another instance where the advice of an experienced attorney can be invaluable. An attorney will inspect your deed and determine whether a warranty deed or a quitclaim deed is sufficient. The attorney will also contact the title insurance company (if a title policy was issued on the property) to determine the insurance company's procedures and policies on such matters. Finally, the attorney will insure that the deed is properly recorded on the land records of the city or town where the property is located. Most attorneys will charge less than a couple hundred dollars to handle this for you. In our experience, the cost is well worth the peace of mind knowing that your beneficiaries won't have to go to court sometime later on to perfect title to the property.
Title Insurance. If you have title insurance on the real property that you want to transfer to your living trust, check with your title insurance company before you make the transfer. Your title insurance company may terminate the policy if you transfer the property because your trustee may not be considered a "successor in interest" under the terms of the policy. If that's the case, then your trustee would have to purchase another title insurance policy or go without. If you don't have a mortgage on the property, then you can decide on your own whether title insurance is necessary. If you do have a mortgage on the property, then the bank or mortgage company may require that you purchase another policy and pay another premium.
In most states, title to real property can be deeded to the trustee and the deed can be recorded on the land records without recording the trust agreement. This is one of the benefits of a revocable living trust for those individuals who desire privacy. However, title examiners for title insurance companies may not approve a title insurance policy unless they can examine the trust instrument. For this reason, those who are reluctant to divulge the terms of the trust instrument often resort to so-called nominee partnerships to hold title to real property rather than the trust. With a nominee partnership, the real property would be owned by the partnership, the partnership would be owned by the trustees, and the partnership would serve as the agent and nominee for the trust. The partnership would hold title to the real property and title would be recorded in the name of the partnership. Most title examiners will not ask for the partnership agreement when an application for a title policy is submitted in the name of the partnership, and there is no reason for the title insurance company to ask for the trust instrument.
Due-On-Sale Clauses. If there is a mortgage on real property that you want to transfer to your living trust, you may want to check with the bank or mortgage company beforehand to make sure that the loan won't be called as a result of the transfer. You should also review your mortgage deed to see if it contains a due-on-sale clause. A due-on-sale clause allows the lender to declare due and payable any outstanding balance owed on your loan if the property securing the loan is sold or otherwise transferred without the lender's consent.
If there is a due-on-sale clause, the transfer of the property to your revocable living trust may be exempt under the Garn-St. Germain Depository Institutions Act of 1982. Under §341(d)(8) of that Act, codified as U.S. Code Sec. 1701j-3(d)(8), an exemption applies in the case of a real property loan that is secured by a mortgage on residential real property containing less than five (5) dwelling units. The exemption applies to a transfer of residential real property to a living trust if you (the grantor) are a beneficiary of the trust. Again, if you have a mortgage on property that you want to transfer to your living trust, you need to address this issue before you make the transfer.
Refinancing. If you want to refinance a loan that is secured by a mortgage on real property held in your trust, you may have some difficulty finding a bank or other lending institution that is willing to make the loan. Mortgage lenders get nervous about using real property held in trust as security for a loan. In that case, the standard practice is to have the trustee transfer the property back to you so that the loan can be processed and a new mortgage deed signed and recorded. Then you can transfer the property back to the trustee.
Every state has its own rules and regulations regarding the conveyancing of real property and, in particular, the conveyancing of real property to the trustee of a revocable living trust. You will find, too, that even lending institutions and title insurance companies have different rules and regulations that are followed in different states.
Here is an all to familiar problem that occurs when an individual transfers real property located out-of-state to the trustee of a revocable living trust. John, a resident of Connecticut, established a revocable living trust and transferred all of his property to the trustee as soon as he signed the documents. Besides his home in Connecticut, John owned a condominium in Florida and decided to transfer the condominium to the trustee in order to avoid an ancillary probate in the event of his death. John gave his Connecticut attorney a copy of the deed, the attorney prepared a new deed, and John signed it before two subscribing witnesses. John’s acknowledgment was taken by his Connecticut attorney as “Commissioner of the Superior Court.” The new deed was then sent to Florida and recorded on the land records in the town in which the condominium was located.
Everything was fine until John died twelve years later. Then John’s son became successor trustee and found a buyer for the Florida condominium. The buyer wanted title insurance and applied for a policy. The title examiner refused to issue the policy because, he said, the Florida statutes require a conveyance of real property to be made by an instrument in writing signed by two subscribing witnesses and duly acknowledged. See Florida General Statutes, §689.01. Under Florida General Statutes, §695.03, out-of-state acknowledgments must be made by 'a judge or clerk of any court of the United States or of any state, territory, or district; a United States commissioner or magistrate; or a notary public, justice of the peace, master in chancery, or registrar or recorder of deeds of any state, territory, or district having a seal . . .' By taking John's acknowledgment as 'Commissioner of the Superior Court,' John's attorney followed the standard practice in Connecticut. However, Florida Statutes don't recognize a Commissioner of the Superior Court and, since John's attorney was neither a judge, a clerk, a United States commissioner or magistrate, or a notary public, justice of the peace, etc., the acknowledgment failed in Florida.
This seemingly minor detail caused the insurance company to refuse to issue a title insurance policy on the condominium. Since the buyer would not go through with the purchase without a title insurance policy, John's son had no choice but to open an ancillary probate in Florida, convey the condominium to the ancillary estate, then get permission from the probate court to sell the condominium to the buyer. By so doing, the buyer was able to get title insurance and the condominium was sold. But, not complying with Florida Statutes in the first place resulted in additional probate fees and additional attorney's fees, and over a four-week delay in completing the sale.
So, if you want to transfer out-of-state real property to your living trust, you need to hire an attorney who practices in the state where the real property is located. Local attorneys are familiar with local laws and local customs. If you don't know an attorney in the state where your real estate is located, try locating an LSP Attorney in that state. For a list of LSP Attorneys, click here.
Homesteads. Each state provides for certain protections against the claims of creditors. One of the more common protections applies to a personal residence. A personal residence generally constitutes a homestead and each state will exempt a specified dollar amount of a person's homestead from the claims of creditors.
What is not entirely clear is whether the transfer of a homestead to a revocable living trust will cause the grantor to lose the homestead exemption. In a 2001 federal bankruptcy case (In re Bosonetto), which involved a Florida residence that was owned by a revocable living trust, the federal bankruptcy court held that Florida's homestead exemption did not apply because the revocable living trust was not a natural person. The decision is not binding on Florida courts, but it does cause some uncertainty in bankruptcy cases involving those domiciled in Florida.
Contrary to the federal bankruptcy court's decision in the Bosonetto case, New Hampshire's laws specifically state that an individual does not lose the homestead exemption by transferring his or her residence to a revocable living trust. See New Hampshire General Statutes, §480.9.
So, if you are concerned about bankruptcy or claims of creditors, find out whether the homestead exemption would continue to apply in your state if your personal residence is transferred to your revocable living trust. If the homestead exemption does not apply to residential property transferred to a revocable living trust, then it would not be a good idea to make the transfer - at least until your financial issues are resolved.
Property tax exemptions. Many individuals receive state and local property tax exemptions on their personal residence for military service or other reasons. Whether these exemptions will continue to apply if the residence is transferred to a revocable living trust is another issue to consider before the transfer is made. The taxing authority may request a copy of the trust instrument in order to grant - or continue - the exemption, in which case you may have to decide whether the tax exemption is worth sacrificing your privacy. If you feel strongly about your privacy, try giving the taxing authority either the specific pages they want or a certificate of trust. You should also ask the taxing authority if you are required to reapply for the exemption each year after your residence is transferred to the trustee.