Deep breath, Jerry - Posted by JGoodsen
Posted by JGoodsen on February 23, 2001 at 02:27:34:
Let?s make a couple of things perfectly clear. First, we are talking solely about the land trust takeover, or buying subject to the existing loans and encumbrances by transferring the beneficial interest from the seller to you. If you are transferring title ?subject to? none of this applies and you are playing roulette if you don?t buy title insurance. Even in a land trust takeover you still need to do your due diligence.
Next, I am not attorney, accountant, or title officer?but you?ll be hard pressed to find any one of these that can actually answer your question in your area no matter how hard you look. Nevertheless, I provide no warranty or guaranty that the following is true or correct and you should consult your professional in these areas (How?s that for CYA?)
Lastly, title companies are private businesses. Even if your position is right, just, legal, logical, moral, ethical, correct, proper and in keeping with best business practices they are not required to write a title insurance policy covering the transfer to your ultimate buyer. If they don?t understand it I?ll remind you ?a confused mind says No!? You may have to find a title company that is more ?enlightened?.
On to the examples Rob FL requested:
- John Smith decides after getting counsel from some yokel over the fence talking about asset protection that he ought to put his house in a living trust so he could avoid probate if he died. He transfers the legal title of his property to the John Smith Family Trust. Does he have to get new title insurance to underwrite this transfer? No. The original title policy still covers this policy against defects in title prior to his taking over the property. When he sells the property his trustee (Probably John Smith since this is a family trust) will sell the property, and his new buyer will likely need title insurance to protect their title interest in the property they just bought.
Are you still with me?
- John Smith goes to a $5 asset protection specialist. After consulting this specialist John realizes if he puts his property into a land trust instead of a family trust he can get not only protection from probate in case of his demise, but he can also get some asset protection by hiding his property using the land trust to get it out of his name. Now here is a key point. To put his property into the land trust he transfers legal and equitable title to the trustee thus divesting himself of ownership of the property. Does he need title insurance to protect his title interest in this transfer? No. The original title policy will continue through the transfer of title from an owner to his land trust. Eventually John Smith decides to sell the property. John?s trustee conducts the sale since the trustee is now the titled owner acting only at John?s discretion. John doesn?t own the property. The new buyer once again will purchase new title insurance to protect the title interest they have now acquired.
I know. More complicated, and some of you are probably lost. We?ll summarize the salient points later. We need to press on.
- John Smith visits a $100 asset protection specialist. After his meeting and an espresso with a little lemon twist John now understands he can not only get probate protection, but really protect his assets instead of hiding them by putting the property into a land trust and then naming an additional beneficiary. John deeds his property into a land trust again transferring both legal and equitable title to his trustee. He then subsequently sets up an assignment of beneficial interest to someone not directly related to him. Did the title company get to make a buck selling a new title policy to John? No. John?s original title policy still covers the title interest into the land trust. A new title policy will only be required when John and his other beneficiary direct the trustee to sell the property to the new owners since it will be required by their lender. Continuing here, it does not matter if you transfer some, all, or part of the beneficial interest in the trust. That only matters with respect to the DOS clause. The trustee is still the owner, and the title insurance remains in effect.
Let?s go back to the original question. Should I buy title insurance when I take over a property subject to using a land trust? It all depends on how risk averse you are. An evasive answer, but let?s see why. First of all, you cannot under any uncertain terms buy title insurance to protect your title interest in the property. Why? Because you don?t have a title interest to protect! When you do business this way you are not acquiring title to the property. Instead, you are receiving a personal property interest in the trust that owns the property. Personal property interests play by a whole different set of rules from those laid out for dealing with that which belongs to the King, real property. You are really dealing with a derivative security interest here.
So what are you getting for those of you that buy title insurance when you complete a transaction like this? We?ve already shown the previous owners? title policy continues to cover the property into the trust and through to the new owner against previous defects in title. At this point for your premium the title company can only guarantee that no new liens or defects have been caused by the current owners during their ownership period have attached to the property. Well guess what? Isn?t what they are doing guaranteeing the same information that would show up in a title report that you could easily read yourself? I mean, either there are or are not liens there. You don?t need to translate, interpolate, or extrapolate.
So what about unrecorded liens out there? Aren?t you getting some protection there? Couldn?t they come along after the property goes into the land trust and bite you like a snake? Think back to what I said before that would be very important. The owners transfer legal and equitable title to the property to the trustee. They don?t own it any more! How can a lien that has not attached to the property suddenly attach after the owners have divested themselves completely of title to the property? The judgment creditor has other avenues of recourse assuming they could find the asset, but attaching a lien to the property is not one of them.
So what is my personal course of action looking to protect my interest in acquiring a property in this fashion? Before putting the property into the land trust and assuming the beneficial interest I?ll run some preliminary title work. If it comes back clean I?ll go ahead with the transaction. After I take 100% of the beneficial interest I?ll name an additional unrelated beneficiary as holding interest in this fashion protects the property from future claims of creditors since you cannot partition a co-beneficiary interest in personal property so as to attach a lien or force sale of the underlying property.
Nowhere in there did I buy title insurance. What is my exposure? I?m covered against defects in title through the previous owner?s title policy. I?m exposed to a blemish that the title company running the report may have missed from the time the current owners took title to the property; nothing prior. I?m also exposed to anything attaching between the time I have the report run and the property is actually deeded into trust. Now it is your decision. Is covering yourself against these two eventualities worth paying for a full title policy, or is that a risk you are willing to take and keep the title premium in your pocket?
Now to address TRandle?s point. Even if the person you originally bought the property from end?s up with a tax lien after the fact remember they no longer own the property and have no interest in the property for the IRS or anyone else to take a piece of. The trustee is the titled owner. There should be no reason why the seller?s subsequent problems can affect the property in any way.
The more I learn about land trusts the more I am convinced they are simply the single most powerful tool any investor can have in their tool box. Now I?m sure this is going to generate a whole lot of questions and challenges, but looking at my schedule I don?t know how available I?m going to be in the next couple of days. I can?t make any promises about how promptly I can defend my position. It?s midnight here now and I had other things that I really should have been doing. I?m pretty sure I am going to miss a deadline for tomorrow as it is, and I?ve got to wrap up some deals before I lose them this weekend. Just thought I ought to see if I could close the loop on this.