Upon the advice of his golfing buddy and estate-planning attorney, Tom transferred title to all his real estate into a living trust. A couple of years after transferring the property and setting up the trust Tom was sued by his neighbor, a new purchaser, who claimed Tom’s house violated the subdivision’s restrictive covenants. Tom called his golfing buddy attorney and told him about being sued and was advised that if he had title insurance to file a claim with the title company and let them handle it. Tom did just that. A couple of weeks later he received a letter in the mail from the title company denying his claim as the defendant in the lawsuit, “Tom’s XYZ Living Trust” was not who was insured in the title policy; Tom was the insured in that policy.
Tom engaged the services of a trial attorney to assist him with the suit. When he told the attorney about the title company denying his claim, the attorney told him not to worry and that they would have the trust sue Tom on the warranties in his deed and force the title company to defend that way. But when a copy of that deed was obtained from the Register of Deeds they discovered the estate-planning attorney had used a Quitclaim Deed that did not have warranties. Tom was left without coverage under the title policy he had purchased.
Is there anything Tom and his estate-planning attorney could have done to have prevented this from happening? The answer will depend upon what version of the ALTA Owner’s Title Insurance Policy is being used. For 1992 ALTA title policies where property is transferred into a living trust or any kind of trust be sure to use a Special Warranty Deed at the very least. There really is not a reason not to use a General Warranty Deed, as the trust is the alter ego of the individual. By using a deed with warranties the trust will be able to sue on those warranties if necessary. Under Item 1 of Schedule A, the title policy lists a named insured. When a claim is submitted the named insured on the policy must be the same as the party making the claim to the title company. If the property has been transferred title coverage may still be invoked so long as an owner remains liable on the warranties of any deed he or she has given.
Fortunately, the 2006 ALTA title policy has provided a remedy for Tom’s situation. Under “Conditions” on the policy cover, “Section 1. Definition of Terms”, the 2006 policy provides:
The following terms when used in this policy mean:
(d) “Insured": The Insured named in Schedule A.
(i) The term "Insured" also includes
(D) a grantee of an Insured under a deed delivered without payment of actual valuable consideration conveying the Title
(4) if the grantee is a trustee or beneficiary of a trust created by a written instrument established by the Insured named in Schedule A for estate planning purposes.
Although title companies have transitioned to the new 2006 policy form there are a lot of the 1992 policies in existence. When a client comes to you and requests you to draft a deed conveying insured property to a trust be sure to check whether your client’s policy is a 1992 or earlier title policy, and if it is, use a Special Warranty Deed for the transfer of title.