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Quitclaim deed to living trust can terminate title insurance coverage and trigger legal malpractice claim


When my clients discovered that a neighbor’s deed included a strip of land across their driveway, I advised them to make a claim on their title insurance policy. The claim was denied, not because it wasn’t real, but because my clients had inadvertently terminated their policy of title insurance by conveying their land to their living trust by quitclaim deed rather than by warranty deed.

Title insurance in the United States is usually issued on policy forms created by the American Land Title Association (ALTA), which are adapted for each state. Before the adoption of the 2006 ALTA title insurance form, when the insured conveys all its interest in the real estate without warranty, the owner’s policy of title insurance terminates.

The primary way of conveying title insurance without warranty is by quitclaim deed, which is a common way of conveying property when payment is not made. How this custom developed, I don’t know, but it can be devastating if there is an ownership dispute.

The 2006 ALTA owner’s policy form includes living trusts as insureds under the title insurance policy, but most owner’s policies of title insurance are made on pre-2006 forms.

A lawyer setting up a living trust–or preparing a conveyance of a gift of real estate to a relative, a church or another charity–has two choices to avoid potential malpractice liability:

  • review the existing owner’s policy of title insurance to make sure that the conveyance won’t leave the the client unprotected if an ownership dispute pops up.
  • avoid using quitclaim deeds except with respect to property that the client never owned and other very limited circumstances.

 

The after-born shall inherit, leaving the nephew out of luck


Elbert and Irma got married. Irma already had a daughter, Deborah. Elbert had a favorite nephew, Robert.

As is often the case, in 1958 Elbert and Irma signed the same will. Not knowing who would die first, their will had to account for both possibilities.

  • If Elbert died first, half of their jointly-owned real estate would go to nephew Robert, who would essentially step into Elbert’s shoes, owning that joint property with Irma.
  • If Irma died first, all her property would be entirely owned by Elbert, until his death, when it would pass in equal shares to Robert and Deborah.

Some time later, Elbert and Irma were blessed with a son, Mark. But the joint will Read the rest of this entry

Maybe being married is okay, even with debts


Capital Bank asked the Taney County Sheriff to sell Rocky’s, a popular Italian restaurant in Branson, to satisfy a judgment awarded by an Arkansas court against the owner of the restaurant. Judge Orr stopped the sheriff’s sale, because the restaurant land and building were owned by Mr. and Mrs. Charles Barnes, while the Arkansas court’s judgment was against only Mr. Barnes. The Missouri Court of Appeals affirmed Judge Orr’s ruling in an opinion dated February 2, 2009.

I had a great lunch at Rocky’s on February 3, so I’m glad that a bank didn’t take over the restaurant.

In Missouri and several other states, a married couple can own property as though they were one person, in a form of ownership called “tenancy by the entirety.” In Missouri, a tenancy by the entirety is presumed to have been created when a deed to a married couple uses the words “husband and wife” after their names, if they are in fact married.  A deed is a written document, signed by the grantor(s), which is evidence of the intent of the grantor to convey property to the grantee(s).

The holding of the Barnes case does not break new ground, but it explains why careful lenders usually insist that a personal guaranty and deed of trust (mortgage) be signed by each spouse, otherwise the collateral may not be reachable. Generally, the tenancy by the entirety form of ownership will stop even the IRS from seizing the property of a married couple for taxes owed only by one spouse.

From the borrower’s point of view, holding real estate as tenants by the entirety can be a good idea. A limited liability company (LLC) or corporation is created as an operating entity for a small business,which leases real estate from the husband and wife. The husband and wife are protected from personal liability for business debts that they have not personally guaranteed. The lease income is not subject to self-employment tax.

An additional question is whether the LLC membership interests or corporate shares should be held by both husband and wife, as tenants by the entireties or whether each should own half or whether some other form of ownership is desirable. Answering this question requires careful analysis by a lawyer, estate planner and tax advisor working together.

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