The following is an except from the 7/2000
Supplement to Chapter 4 of Joyce Palomar’s treatise, TITLE INSURANCE LAW,
published by Westgroup.
§
4.04[9] TRUSTS
Both
the trustee who holds legal title and beneficiaries who hold equitable title have
insurable interests and may be named insureds under a policy insuring title to
real property held in a trust. The
trust should not be named as the insured, except in states where a trust is
statutorily recognized as a legal entity capable of holding title. Most often, the policy names the trustee as
the insured. Questions have arisen when
the trustee or trust is the named insured and a beneficiary of the trust makes
a claim against the policy. It has been
held that a title insurance policy is for the benefit of the owners of
equitable title, although they are not named insureds in the policy. Therefore, the policy’s non-assignability
clause did not preclude the beneficial owners of the property from asserting a
claim under a policy issued in the trustee’s
name.[1]
If
the record title and the policy are in the trustee’s name, a transfer of the
beneficial interests in the trust does not require a record transfer of the
real property and, therefore, should not require the issuance of a new title insurance
policy.[2] Neither would the resignation of the named
trustee and appointment of a successor trustee require issuance of a new policy
or defeat a claim by the successor trustee.[3] As one writer summarizes, “In . . . a title
insurance analysis, a trust shares in the corporate attribute of continuity of
existence until the trust has been terminated by operation of law, by statute
or an express trust provision.”[4]
With
increased use of revocable living trusts for estate planning, it is important
to understand whether a title insurance policy’s protection continues after the
insured has deeded property to the trustee of the insured’s revocable living
trust. Can the title insurer deny a
subsequent claim of the named insured on the grounds that the insured no longer
owns an interest in the land? Can the
title insurer deny a claim by the trustee on the grounds that the trustee is
not the named insured under the policy or a “successor” of the named insured? Must owners or lenders who transfer insured
property interests into their own revocable living trust pay for a new title
insurance policy naming the trustee as the insured?
The
standard American Land Title Association [“ALTA”] owner’s policy is limited to
cover:
only so long as the insured retains an estate
or interest in the land, or holds an indebtedness secured by a purchase money
mortgage given by a purchaser from the insured, or only so long as the insured
shall have liability by reason of covenants of warranty made by the insured in
any transfer or conveyance of the estate or interest. This policy shall not continue in force in favor of any purchaser
from the insured . . ..”[5]
The ALTA policy does include within its
definition of “the insured” those who succeed to the insured interest by
operation of law as distinguished from purchase, including “heirs,
distributees, devisees, survivors, personal representatives, next of kin, or
corporate or fiduciary successors.”[6] A trustee does not “purchase” the property
from the insured “trustor” and some have argued that the trustee of the named
insured’s trust could be considered a “fiduciary successor.” Yet, the insured’s conveyance by deed to a
trustee is not a succession “by operation of law” as the policy definition
specifies.
The
United States District Court for the District of Wyoming has considered some of
these questions in the context of a title insurance policy that defined “the
insured” as “the heirs, devisees, personal representatives of such Insured, or
if a corporation, its successors by dissolution, merger or consolidation.”[7] An insured ranch owner had quitclaimed his
ranch to his revocable living trust and named his wife as beneficiary. Two years later, the trustor died and three
years after that, a title problem caused a loss. The trustee contended that the intent of the policy definition
was to provide coverage so long as the substance of the insured did not change,
and only the form did. Conversely,
First American Title Insurance Company argued that the policy unambiguously
limited coverage to the named insured owner and those successors identified in
the policy, and that the trust was not an heir, devisee, or personal
representative. The court granted First
American’s Motion for Partial Summary Judgment, concluding, “The plain language
of the policy limits coverage to L.B. Maytag, Jr., and his heirs, devisees, and
personal representatives. The Maytag
Trust is not an heir, devisee, or personal representative, thus the policy does
not cover it.”[8] The Tenth Circuit Court of Appeals agreed
with the District Court’s analysis in an unpublished Order And Judgment[9]
(which is not binding precedent, except under the doctrines of law of the case,
res judicata, and collateral estoppel, and may not be cited except under the
terms and conditions of Tenth Circuit Court Rule 36.3).
These courts looked only at narrow
definitions of the words “heirs, devisees and personal representatives” and
failed to recognize the substantive reality that continuing a title policy’s
coverage in favor of an insured’s trustee or beneficiaries presents no
different or greater risk to the insurer than does the policy’s express
continuing coverage in favor of the insured’s heirs, devisees and personal
representatives. Had the insured
owner’s wife received title to her husband’s land via his will or state
intestacy laws, either she or her husband’s personal representative would have
had a claim against her husband’s title policy. Should the result be different solely because her husband was
advised to use a revocable living trust as an estate planning device rather
than a will?
If
the insured trustor in this case had still been living when the title problem
was uncovered, he should have had a cognizable claim under his title insurance
policy for the loss in value of the property interest he retained pursuant to
his power to revoke the trust. In a
property insurance case, Queen v. Vermont Mutual Insurance Company, a
Massachusetts court has held that a couple who transferred their home to a
revocable trust that named themselves as beneficiaries retained an insurable
interest in the home when it later was destroyed by fire.[10] They, therefore, had a claim under the
homeowners insurance policy that named them personally as insureds.
In October 1998, the American Land Title
Association resolved these questions for future homeowners by adopting a new
form policy for owners of one-to-four family residences.[11] Its definitions and its “continuation of
coverage” condition expressly extend this policy’s coverage to the trustee and
beneficiaries of a living trust to which the insured transfers the home after
the policy date.[12] The title insurer does retain the right to
assert against the trustee or beneficiaries any defenses the insurer would have
had against the insured trustor. The
California Land Title Association added such coverage to its Homeowners
policies earlier the same year.
Additionally, the ALTA reportedly is working on an extended coverage
residential loan policy to match its Homeowner's policies.[13]
Nevertheless, with residential policies
prior to 1998 and with policies that insure title to property other than homes,
disputes still may arise regarding whether the policy covers (i) claims by the
named insured after the insured has deeded the property into her revocable living
trust and (ii) claims by a trustee or beneficiary of the trust. The same issues may arise when an insured
owner transfers property to a family limited partnership, limited liability
company or Subchapter S corporation in which family members are given interests
in the property or the transferee.[14] In each of these situations, the title
insurer could attempt to defend against any claim on the basis that the
transferee is not an insured under the policy.[15]
Counsel for insureds who are making or have
made such transfers of real property when estate planning for clients can avoid
problems like those above in several different ways. One technique is to have the insured owner ask the title insurer
for an Additional Insured Endorsement.
Some title insurers have a version of this endorsement that is
specifically entitled "Inter Vivos Trust Endorsement."[16] Title insurers will issue these with minimal
charge or no charge and thereby extend the insured owner’s protection to a
donee such as the trustee of the insured’s living trust. The title company will want full disclosure
of the particulars of the transaction, including the status and relationship of
all parties, so that it can determine that the transfer truly is donative in
nature and does not actually constitute a sale or otherwise increase the title
insurer’s risk.[17] The drawback to this technique is that the
additional insured’s protection will only be as per the title insurance
policy’s original terms. This means,
first, that the policy will only indemnify for losses caused by defects, liens,
or encumbrances that existed before the date the original policy was
issued. Thus, the policy and
endorsement will not cover any title defect stemming from the transfer to the
trustee. A particular example is that, in
a state where a trust is not a legal entity, if the deed erroneously named the
trust as grantee rather than the trustee and the conveyance subsequently is
avoided, the policy would provide no coverage. Second, unless the policy contains an inflation rider, the
maximum recoverable will be the amount of insurance purchased, which usually
equals the amount the insured originally paid for the property. If the property value has increased
significantly, the trustee may be underinsured. For these reasons, counsel should discuss with the insured
whether it would be prudent to obtain a new owner’s policy rather than relying
on an endorsement to the original owner’s policy.
Purchasing a new title insurance policy that
names the trustee[18]
as the insured, insures the property for its current value, and has an
effective date after the recordation of the deed to the trustee is the second
technique for avoiding disputes about whether coverage continues after an
insured owner deeds the property to her revocable living trust.[19] Of course, the cost is the deterrent to
purchasing a new policy. In most areas,
a reissue rate is available if the new title insurance policy is purchased from
the same company that issued the transferor’s policy, since the title company
may feel comfortable merely updating its title examination from the date of the
earlier policy.
A third technique many employ is to transfer
to the trustee by warranty deed, rather than the quitclaim deed often used for
intra-family transfers. Standard ALTA
title insurance policies provide that coverage continues “. . . so long as the
insured shall have liability by reason of covenants of warranty made by the
insured in any transfer or conveyance of the estate or interest.”[20] Upon discovering a title defect, the trustee[21]
can make a claim against the trustor, who then can make a claim against its
title insurance policy.[22] However, the same limitations exist as when
the insured trustor adds an endorsement to the original owner’s policy rather
than purchasing a new policy in the trustee’s name, i.e., (1) the policy
will not indemnify for losses caused by defects, liens or encumbrances created after
its original date, including any created in the transaction transferring title
to the trustee; and (2) recovery will be limited to the amount of insurance
stated in the trustor’s policy.
Additionally, this technique will not be effective in states where
recovery under warranty deed covenants limited to the consideration the grantor
received.[23] Since the trustee pays no consideration for
the estate planning transfer, the trustor would have no liability for damages
and, thus, would have no loss recoverable under his title insurance policy.[24] Further, if the trustor is deceased by the
time the title defect is uncovered, as in the Wyoming case discussed above, the
trustee has no one to sue. Another risk
of this technique is that, if the trustor is still alive at the time the title
defect is discovered, but by that time the trust has sold the property to
another, that transferee would have an action against the trustor, since
warranty deed covenants normally run with the land.[25] In some states, the trustor might be
permitted to avoid this latter problem by limiting the warranties to the
benefit of the initial transferee/trustee only.[26] One more risk of this third technique stems
from the fact that the trustee must assert a claim against the trustor for
breach of the warranty deed covenants in order to trigger the title insurer’s
obligation to defend and indemnify under the trustor’s title insurance
policy. Though this act is intended to
cause the trustor’s title insurer to defend and pay the claim, in the midst of
depositions and lawsuits, the trustor could become offended at the idea that family
members to whom the trustor has given a gift of valuable property would file a
formal claim or a lawsuit against the trustor.
[1] Spellings v. Lawyers’ Title
Ins. Corp., 644 S.W.2d 804, 807 (Tex. App. 1982).
[2] Weinreich, Commercial
Transactions: Who Does the Title Insurance Cover?” 6 Prob. & Prop. 42,
46 (1992).
[3] Id. at 46.
[4] Id.
[5] See at Joyce Palomar, Title Insurance Law, Appendix
D, ALTA 1992 Owner’s Policy, Conditions & Stipulations ¶ 2 (10/17/92). See also discussion of the policy’s
continuation of coverage condition at Joyce Palomar, Title Insurance Law §
4.04[1][a] & [b].
[6] See Joyce Palomar, Title Insurance Law, Appendix D.
[7] Order On Motions for
Partial Summary Judgment, in Covalt v. First American Title Ins. Co., No.
95-CV-1044-B (D.C. Wyo April 26,
1996). This Order has not been
published.
[8] Id. at p. G-21.
[9] Covalt v. First American Title Insurance Company, 105 F.3d 669,
1997 WL 4273 (10th Cir.(Wyo.)).
[10] Queen v. Vermont Mut. Ins.
Co., 589 N.E.2d 325, 327 - 328 (Mass. App. 1992).
[11] See Joyce Palomar, Title Insurance Law, Appendix
H. The 1979 and 1987 ALTA Residential
Policy forms both provided continuation of coverage for “anyone who receives
your title because of your death.”
[12] Id. First American Title Insurance Company had first begun offering this coverage in its "Eagle" policy forms for homeowners. Other companies copied First American’s Eagle, and gave their variations brand names of their own, like Lawyer’s Title’s “Advantage” policy or Stewart Title’s Gold policy. When the CLTA, and then the ALTA produced standard versions of these policies, they called the standard policies the CLTA or ALTA “Homeowner’s Policies.” E-mail to the author from Robert S. Bozarth, Vice President & Major Transactions Counsel, LandAmerica Financial Group, Inc. (Jan. 10, 2000).
[13] E-mail to the author from Robert S. Bozarth, Vice President
& Major Transactions Counsel, LandAmerica Financial Group, Inc. (Jan. 10,
2000).
[14] Jonathan Rivin, Thomas J. Stikker, Title Insurance For Estate Planning Transfers, p. 15, Probate and Property (May/June 1998). This article considers the issue of who is insured from an estate planning perspective. In addition to who is insured when an insured owner transfers title to a revocable living trust, the article notes that title insurance concerns may arise when an insured owner makes an outright gift of a half or other partial interest in the real property and when an insured owner deeds real property to another person or entity for estate planning purposes, but does not record the transfer. The authors advise:
Of course, new title insurance resolves any questions about partial interest transfers. Additional Insured endorsements, perhaps by analogy to Fairway endorsements, can cover the definitional issue of who is insured, but will not address problems arising from the passage of time since issuance of the original policy.
Some lawyers may be tempted to execute and deliver deeds accomplishing estate planning transfers, but then not to record them immediately, to avoid transfer taxes and increased property tax assessments and to protect confidentiality of the transaction. Failure to record may enable the parties to attempt to unwind a transaction privately. In the event of a title insurance claim, the title company may never become aware of the transfer or its reversal, and so may never assert the coverage issue in defense of such a claim. This approach is not recommended; it is an intentional attempt to mislead, and would subject the parties to defenses and exposure for concealment of material facts relating to the claim, not to mention possible tax fraud.
Id. at 18 - 19.
[15] Id.
[16] For example, a form of Inter Vivos Trust Endorsement reportedly is available in New Jersey, for a fee of fifty dollars.
[17] Id.
[18] As stated in the text supra, the same issues may arise and
the same techniques may be appropriate when an insured owner transfers property
to a family limited partnership, limited liability company or Subchapter S
corporation in which family members are given interests in the property or the
transferee. Id. at 15.
[19] Id. at 16.
[20] See at Joyce
Palomar, Title Insurance Law, Appendix D, ALTA Owner’s Policy,
Conditions & Stipulations ¶ 2 (Revised 10/17/92) and at Appendix E, ALTA
Loan Policy, Conditions & Stipulations ¶ 2(b) (Revised 10/17/92). See also discussion of this continuing “warranty coverage” infra
at § 4.04[1][b].
[21] Again, this same technique may be utilized when an insured owner transfers interests in land to a family limited partnership, limited liability company or Subchapter S corporation and family members are given interests in the property or the transferee.
[22] See Jonathan Rivin, Thomas J. Stikker, Title Insurance For Estate Planning Transfers, p. 17, Probate and Property (May/June 1998).
[23] Id
.
[24] Id.
[25] Id.
[26] Id.