When using trusts in estate planning, a key element includes transferring the trustmaker’s real estate into the trust by recording a deed with the local recording authority. This step is crucial for ensuring that the trustee has the power to manage and ultimately sell or transfer the property should the trustmaker become incapacitated or die. If the trustmaker were to die without retitling the property in the trust’s name, the property might have to pass through the probate process even if the trustmaker had a will. Probate is a state court process that often involves significant time and money and causes complications that many people would rather avoid.
However, an important question arises regarding the type of deed that should be used for transferring real property into the trust’s name. Several types of deeds can be used, one of which is a general warranty deed. The other types of deeds commonly used in the United States for transferring property are quitclaim deeds and special warranty deeds. Although a complete discussion of the differences among the types of deeds is not possible in an article of this length, the following information briefly explains each type of deed and why someone might want to use it when transferring ownership of real property.
When someone wants to transfer whatever property rights they have in a parcel of property, they can use a quitclaim deed. When individual drafts and sign a quitclaim deed, they are, in effect, making a statement that whatever they own regarding the property described in the deed is now transferred to the transferee.
However, what makes quitclaim deeds unique is that the transferor who creates and signs the quitclaim deed is also putting the transferee on notice that they make no promises whatsoever that they own the property. If they own the property, it is effectively transferred using the quitclaim deed after being recorded with the local recording authority. But if it turns out that the transferor did not own the property, the transferee cannot bring a claim against the transferor unless they can prove that the transferor knowingly intended to defraud the transferee. However, if the transferor thought they owned the property but did not own it because of some problem with the title, the transferee would have no ability to make the transferor legally liable for the error.
However, it is still common for individuals to use quitclaim deeds when transferring real property into a family trust for estate planning purposes. They (or their attorneys) reason that a quitclaim deed transfers any ownership interest you may have in the property to your trust so that your trust can hold and manage it if you become incapacitated or die. Then, when the time comes to sell the property, the purchaser will, presumably, buy title insurance to cover any past defects in the title when they take the property.
General Warranty Deeds
Another frequently used option is a general warranty deed. The transferor can use this type of deed to assure the transferee that the property is free from encumbrances such as a mortgage or lien and that the title is free from defects. By signing the warranty deed, the transferor promises that they will be liable to the transferee for any costs associated with such mistakes.
As you might imagine, most transferees in an arms-length purchase require that the deed transferring the property to them by a general warranty deed. Without such warranties by the transferor, the real estate transaction is much riskier for the transferee. In addition, title insurance policies will frequently discontinue coverage for a parcel of property that has been transferred with a deed other than a warranty deed. Thus, if you want your title insurance policy to continue to provide coverage after you transfer real property to your trust, a business entity, or a family member, you will most likely need to use a general warranty deed or purchase a new title insurance policy to cover the transfer.
Special Warranty Deeds
Like general warranty deeds, a special warranty deed makes specific promises (or warranties) to the transferee that the property’s title has no liens, encumbrances, or title defects that arose while the transferor owned the property. However, the transferor does not make any warranties that there are no title defects that occurred before the transferor took possession or title to the property. Thus, a special warranty deed provides more protection for the transferee than a quitclaim deed, but it is not nearly as protective as a general warranty deed. And, as mentioned above, there is also a risk that is using a special warranty deed to transfer your property into a trust, to a family member, or to a business entity that you fully or partially own could void the property’s title insurance policy.
The Bottom Line
When determining which kind of deed you want to use to transfer your real property to your trust or a business entity, such as a limited liability company or a family limited partnership, you must consider a few things. First, how confident are you that no liens, encumbrances, or other title defects exist on your property? If you are very secure, a quitclaim deed may be appropriate, particularly if you intend the property to remain in the trust or business entity for a very long time and you do not anticipate a sale or transfer of the property to a third party who will require warranties about the title.
However, in general, the safest course of action for both transferor and transferee in any real estate transaction is to use a general warranty deed accompanied by an in-force title insurance policy that covers the transferee for any title defects that may have occurred before – or during – the transferor’s ownership. We can assist you if you have a piece of property that you need to transfer to your trust or other entity as part of your estate plan.
At Cheever Law, APC, we don’t just draft documents; we ensure you make informed and empowered decisions about life and death for yourself and the people you love, which starts at a valuable and educational Family Wealth Planning Session. The Family Wealth Planning Session will allow you to get more financially organized than you’ve ever been before and make all the best choices for the people you love. If you have already completed your estate plan, we will review that plan at your Life & Legacy Planning Session (aka Family Wealth Planning Session) to ensure that it will work the way you intend and address any holes or gaps that may be present if circumstances have changed since you executed your plan.