To avoid probate with a trust-based estate plan, ownership of real estate must be transferred so it is an asset of the trust. In asset protection planning, ownership of real estate might be transferred to a legal entity such as a limited liability company (LLC). Regardless of the reason for the transfer, there are three mistakes to avoid when you transfer the ownership of your real estate. Those mistakes are discussed below.
- Unintentionally triggering the “due-on-sale clause”
A mortgage agreement typically contains a due-on-sale clause, stating that the mortgage must be repaid in full when an ownership interest in the mortgaged real estate is sold or transferred. Some title transfers are exempt under a federal law called the Garn–St. Germain Depository Institutions Act of 1982 (the “Act”) (12 C.F.R. § 191). For example, under the Act, transferring ownership of real estate to a revocable living trust typically does not trigger the application of the due-on-sale clause, but transfers to an LLC or another type of legal entity might.
If the encumbered real estate you wish to transfer to your living trust is your homestead, such as a single-family home, that transfer is covered by the Act, so the due-on-sale clause of the mortgage would not be triggered upon transferring ownership to your trust.
Before you transfer ownership of your encumbered real estate to an LLC, obtain written approval from your lender to avoid triggering the due-on-sale clause. Lenders may not grant approval or your lender may grant approval to transfer ownership after the loan secured by your real estate is restructured, e.g. the loan would have a different interest rate.
- Accidentally Terminating Title Insurance Coverage
The terms of an owner’s title insurance policy may differ on whether real estate transferred to a trust or an LLC will terminate the title policy. The answer can be found in the language of each policy, which might cover trustees as insured parties. Clients and attorneys should assume transferring real estate risks terminating an owner’s title insurance policy. For an owner’s policy of title insurance issued for Florida real estate, check with your real estate attorney or the title insurance company that issued the policy to determine whether your coverage will continue if you transfer ownership to your trust, or to an LLC or other legal entity.
For example, in the 2009 case of Kwok v. Transnation Title Insurance Co. [170 Cal.App.4th 1562, 89 Cal. Rptr. 3d 141 (Cal. Ct. App. 2009)], a family transferred their real estate from an LLC to a trust before dissolving the LLC. The family later made a claim on their title insurance policy. The California Court of Appeals affirmed the transfer to the trust had voided their title insurance policy because the LLC was still named as the insured.
With real estate in other states, it may be possible that the title insurance policy does not address this issue. An endorsement to your owner’s policy of title insurance naming a new or additional insured party may be available. When checking, ask about the premium cost of the endorsement, which may be at no, or nominal, cost.
- Failing to notify your insurance company
Once you have determined that the transfer is advisable from the mortgage and title insurance perspectives, talk with your insurance agent about transferring ownership of your real estate to a trust before you do the transfer. That way, the trustee of your trust may be added as the named insured of the insurance policy. Your homeowner’s insurance is important in not only providing coverage in a loss or damage to your real estate’s improvements, it also provides liability coverage to protect the “named insured” if injury or damage occurs on the real estate to another person or their property. An endorsement may have to be issued to show that the trustee of the trust is a named insured so there is continuity of coverage after a transfer of ownership.
Learn More about Real Estate Title Issues
Issues with real estate proliferate and must be carefully considered, particularly when transferring its ownership. There can be a multitude of tax, estate planning, asset protection, and reporting considerations to consider before you proceed with actually transferring ownership of your real estate to a trust or a legal entity such as an LLC. Before you transfer the ownership of your real estate, please contact us at (813) 852-6500 to discuss your options and what we may recommend before you initiate the transfer.