Dead Man "Kwoking": Estate Planning Property Transfers Can Trigger Title Insurance Nightmares
by Jack S. Johal
Estate planning attorneys regularly advise their clients about the tax and other advantages of transferring real property to revocable trusts or similar estate planning vehicles; however they may not consider the potentially disastrous title insurance implications of these transfers. The original property owners may have had coverage under their title insurance policy, but once the property is transferred to the estate planning entity, the entity (i.e., trustee of the trust) isn't the "insured" and coverage could be lost depending on the type of policy.
The consequences of losing valid title insurance coverage can be significant. Covered matters include, without limitation, lack of a right of access, marketability of title, defects, liens or encumbrances on the title. These are all significant and often expensive matters to resolve.
The case of Kwok v. Transnation Title Ins. Co. (2009) 170 CA4th 1562 illustrates the issues faced by the property owner, who found themselves in an easement dispute with their neighbors. Although they may have had a valid claim under their title insurance policy, they transferred title to their property from their limited liability company (the named "insured" under the title insurance policy) to an irrevocable trust. The insureds unsuccessfully argued that the transfer only affected a change in the method of holding legal title and not a change in their proportional beneficial interest. Focusing on the definition of insured in the title insurance policy, the Court was not persuaded:
…the issue before us is not whether there was a change in the beneficial ownership of the property, but rather whether appellants, as trustees of their family trust, succeeded as insureds under the terms of the policy. There is nothing in the policy definition of "insureds" that identifies "beneficial owners" as insureds. Under the terms of the policy, appellants could only become insureds by operation of law. The transfer of property by an insured into a family trust is a voluntary act and not one that arises by operation of law. [emphasis added.]
To avoid this title insurance nightmare, an estate planning attorney can take certain precautions:
- Ask the client for a copy of the title insurance policy to review the definition of "insured" to include a revocable trust or estate planning entities.
- If the title insurance policy has a narrow definition of insured, contact the title insurance company and obtain an Additional Insured endorsement (CLTA 107.10).
The Homeowner's Policy of Title Insurance, adopted in 1998 and currently the default policy under the California Association of Realtors contract, specifically includes transfers to estate planning entities as an event that does not terminate coverage (Conditions 2b Continuation of Coverage). By contrast, the CLTA Standard Coverage Policy (the policy issued to the majority of homeowners before 1998) doesn't include estate planning entities as an insured. The Kwoks had a CLTA Standard Coverage Policy.
If your client has a title insurance policy that doesn't include coverage after transfer to an estate planning entity, the Additional Insured endorsement will ensure that the title insurance policy doesn't lapse, when there is a conveyance of real property into a trust or other estate planning entity. There is no distinction between revocable and irrevocable trusts with regard to coverage, except that the property owner can revoke their revocable trust to continue coverage.
If your client cannot find a copy of the title insurance policy (estate planning may occur decades after the purchase of the property), a review of the grant deed may offer a clue as to the insurer. At the top of the grant deed, the title insured or its underwritten agent is generally listed as the entity requesting recordation of the deed. The deed of trust obtained at the time of purchase may also offer clues as to the insurer. For example, the title company many be named the trustee in the deed of trust and the estate planning attorney can then contact the title company.
Please contact me if you have any additional questions.
DISCLAIMER: This publication does not constitute legal advice. Readers should consult with their own legal counsel for the most current information and to obtain professional advice before acting on any of the information presented.
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