Title Insurance Issues After Transferring Real Property To Revocable Living Trust

What is title insurance?

When you purchase real property, most often you also purchase a title insurance policy. Title insurance compensates you for losses resulting from mistakes the title company made when researching title to your real property during a transaction. These may include undiscovered liens, easements, or other boundary disputes. When you sell your property, the title insurance is canceled. Similarly, depending on what type of policy you purchased, the policy holder also might cancel your title insurance if you transfer the real property into a revocable trust.

Kwok v. Transnation Title Ins. Co., 170 Cal. App. 4th 1562 (2009)

This California Court of Appeals case involved a transfer of title of real property by use of a grant deed. A grant deed “grants” or “conveys” title to real property from the grantor to the grantee. This is also the mechanism for funding revocable trusts established through Trust Agreements under California Probate Code §15200(b). In the Kwok v. Transnation Title Ins. Co. case, several individuals owned a limited liability company (LLC), and the LLC was the owner on title of a parcel of real property. The LLC (through it owners) transferred the LLC’s interest in the real property to the revocable trusts of the owners of the LLC. The court held that this transfer constituted a voluntary act not covered by their title insurance contracts, which consequently terminated their title insurance coverage. After Kwok, voluntary transfers of real property to a revocable trust may terminate title insurance for the real property under the terms of some title insurance policy provisions.

How does this affect those who transferred real property to their living trust?

Whether title insurance terminates by transferring real property to a revocable trust depends on the type of policy, and how “insured” is defined in the policy:

• ALTA Owner’s Policy 1970, 1987, 1992 and 1990: Under this policy, the definition of “insured” is the insured named in Schedule A and those who succeed to the insured’s interest by operation of law, as distinguished from a purchase. These policies do not extend coverage to transferees of voluntary transfers. In other words, if you hold any of these policies on any real property transferred to your revocable trust, your title insurance will be considered cancelled as a result.
• CLTA Standard Coverage Policy 1190: This was the policy that the owners held in the Kwok case. Under this policy, the definition of “insured” is the same as in the above ALTA Owner’s Policy 1970, 1987, 1992 and 1990. Similarly, these policies do not extend coverage to transferees of voluntary transfers. If you hold any of these policies on any real property transferred to your revocable trust, your title insurance will be considered cancelled as a result.
• ALTA Residential Title Insurance Policy 1979 and 1987: This policy does not define “insured” within its terms. The policy protects you even if you transfer your real property to your revocable trust as long as you are the owner on title, or you own a mortgage from anyone who buys your land or to whom you are liable for any title warranty you make. This type of policy is ambiguous under Kwok. Therefore, if you hold any of these policies on any real property transferred to your revocable trust, your title insurance may be considered cancelled as a result
• CLTA/ALTA Homeowner’s Policy of Title Insurance from 1998 to the present: This policy specifies that the policy covers the “Trustee or Successor Trustee of a Trust to whom you transfer your title after the policy date; or, the beneficiaries of your Trust upon your death.” Therefore, this policy does cover voluntary transfers, and your title insurance will not be considered cancelled as a result.

What are your options if your policy does not cover transfers to revocable trusts?

As discussed above, the ALTA Owner’s Policy 1970, 1987, 1992 and 1990, and the CLTA Standard Coverage Policy 1190 do not cover voluntary transfer to revocable trusts, and ALTA Residential Title Insurance Policy 1979 and 1987 do not likely cover voluntary transfers of real property into revocable trusts. Therefore, the Law Offices of Tyler Q. Dahl recommends that you contact your title insurance company to determine coverage. If your policy does not cover transfers to revocable trusts, you should:

• Obtain an endorsement on your title insurance policy;
• Obtain expanded coverage on your title insurance policy to include coverage for trustees and successor trustees; or
• Obtain a new CLTA/ALTA Homeowner’s Policy of Title Insurance from 1998 to present.

Endorsements can be obtained quite inexpensively, the cost ranging from $50.00 to $150.00 in most instances. If you do not choose any of the above options, you are accepting the risk of a Kwok-like policy, which could result in cancellation of your title insurance and complete loss of your real property without compensation in the event that a title issue regarding your real property arises.

If you have questions about how transferring the title of real property to a trust might affect your title insurance, or any other questions regarding estate planning, please do not hesitate to call the Law Offices of Tyler Q. Dahl to set up a free consultation.