The increasing use of revocable living trusts has raised questions as to whether title insurance issued to the settlor will continue in force for the trustee, a successor trustee or a beneficiary, after there is a declaration of trust or title is conveyed pursuant to the trust. If a title insurance policy that names the settlor as the insured does not continue in force for the successor, then estate planners may want to consider obtaining an endorsement to the policy adding the trustee as an additional insured. An endorsement will ensure that the title insurance policy does not lapse when there is either a declaration of trust or the actual conveyance of real property into the trust.
This issue was recently brought into focus by 1997 legislation, AB 1170, which among other things would have added a section to the title insurance law that would have dealt with continuation of coverage under a title policy under certain circumstances involving revocable trusts. Although the section was not included in the final version of the legislation, the issue of insuring title for an inter vivos trust is something for practitioners to consider.
A good place to start an examination of this matter is the title policy language itself. Paragraph 1(a) in the Conditions and Stipulations of the California Land Title Association Standard Coverage Policy (1990) defines an insured as:
"The insured named in Schedule A and ÿ those who succeed to the interest of the insured by operation of law as distinguished from purchase including, but not limited to, heirs, distributees, devisees, survivors, personal representatives, next of kin, or corporate or fiduciary successors."
The policy language continues successor coverage by operation of law; however, the actual property transfer to a trustee under a revocable living trust is a voluntary conveyance and has not been considered a succession to title by operation of law. The same view applies to the situation where the settlor does not execute any conveyance documents but simply lists the property in the declaration of trust or an exhibit to the declaration. This is distinguished from the trust property distribution where a policy has named the trustee as the insured and continues in force for the beneficiaries. The failure to have the trustee as a named insured raises two issues.
The first issue involves claims. When the settlor is still alive, any title claims tendered to the title insurer may be treated as claims against the settlor as the policy’s named insured, whether or not the property has been actually conveyed into the trust. This is because the insured settlor retains a property interest since he or she could always revoke the trust. The more serious issue arises when the settlor dies and there is a claim under the policy by a successor trustee or trust beneficiary.
Case law in this area generally has upheld termination of coverage upon a voluntary transfer to a different entity. See Fairway Development Co. v. Title Ins. Co. of Minnesota, 621 F. Supp. 120 (N.D. Ohio 1985), and Pioneer Nat'l Title Ins. Co. v. Child, Inc., 401 A.2d 68 (Del. 1979) The only appellate decision directly on point with respect to revocable trusts is an unpublished case, Covalt v. First American Title Ins. Co., 1997 WL 4273 (10th Cir. 1997) which held that a successor trustee was not an insured under the deceased settlor’s policy.
Although the actual conveyance to a trustee is preferable from a title insurance perspective, California law makes a properly executed written declaration of trust sufficient, by itself, to create a revocable living trust without the necessity of transferring the property to the trust. Estate of Heggstad, 16 Cal.App.4th 943 (1993). It is not uncommon for settlors to fail to transfer real property into trust by deed. Instead, some settlors prefer to keep title in their names in order to be able to deal with the real property as fee owners, and actually only intend for the trust to become operative at the time of their death.
If the settlor does deal with the real property as if it is not in a trust, for instance refinancing without disclosing to the lender that the property was transferred to a living trust by a declaration of trust, then problems can arise. Was there a present intent to transfer the property by the declaration of trust? Did the settlor remove the property from the trust by dealing with it as if title were still in the settlor’s name rather than as a trustee under a trust? Thus, there is a danger that, under certain circumstances, a petition under Probate Code Section 17200 to establish the validity of the trust could be denied or that, unlike Heggstad, a petition for instructions might result in a determination that real property was not trust property.
After the settlor’s death, title claims may arise and title insurance coverage may become problematic. There could be a claim made that the settlor lacked capacity at the time the trust was executed -- a post-policy event and not covered by the settlor’s original title insurance policy. Or someone might assert an easement claim adverse to the trust beneficiaries that, absent the transfer into the trust or a declaration of trust, would have required the settlor be provided a defense obligation under the policy terms. This defense obligation would have terminated due to the transfer to the trust and the settlor’s death.
After the settlor’s death, an underwriting issue can arise if title insurance is requested upon a sale by the trustee or beneficiary, but no deed was used to grant the real property into the trustee’s name. Where there is no dispute among the beneficiaries, there probably won=t be any court orders confirming the validity of the trust or establishing real property as trust property. In those cases, the title company will be called upon to make an underwriting decision when a successor trustee seeks to convey real property out of the trust and the purchaser wants title insurance.
Similarly, a beneficiary to whom the trustee transferred property may be selling the property, and title insurance is requested. Without a deed into the trustee’s name, a successor’s trustee’s deed conveying property out of the trust will be a Awild deed@ because there is a break in the chain of title. In those cases, the title insurer must satisfy itself that the declaration was sufficient to transfer the property into the trust. Defects in execution, incapacity, present intent to transfer, description of the real property and property acquired after the execution of the trust all are matters that the title insurer must deal with in the underwriting process.
A sound underwriting approach might be to require the trustee to petition the probate court under Probate Code Section 17200 to establish the trust’s validity. The order would at least provide a judicial determination for a title insurer to rely upon in issuing a title insurance policy. A title insurance underwriter might also require the recording of the trust itself.
The uncertainty of both the claims and underwriting situations points out the need to address potential problems in advance. One relatively simple solution is for the settlor to obtain an endorsement to the existing title insurance policy adding the trustee of the inter vivos trust as an insured. The CLTA Endorsement Form 107.9 is intended to add an additional insured and can be used for living trusts. However, the endorsement language doesn’t protect the trustee if the trustee fails to acquire an insurable estate or interest in the land or, if by adding the trustee, any defect, lien or encumbrance attaches to the property.
Title Insurance companies have recently filed with the Department of Insurance new title insurance policies that have a broader definition of insured than the standard CLTA Owner=s Policy or the Form 107.9 endorsement. In one example, the insured is defined to include Athe trustee or successor trustee of a trust in which you are the trustor/settlor to whom you transfer your title after the policy date.@
This language does not contain the limitations in the Form 107.9 endorsement and, therefore, provides coverage in more instances. In this respect, it is closer to the CLTA Endorsement 107.10, which adds additional insureds but does not contain the two limitations. However, since these policies are relatively recent, most settlors with real property they want to place into a living trust will not have the benefit of the newer policies’ expanded definition of insured.
While an owner may prefer not to convey real property to himself as trustee and obtain an endorsement to a title policy, it may save a number of headaches later on, and will certainly expedite a successor trustee’s subsequent transfers out of the trust.
For lawyers engaged in estate planning, the title insurance aspects of the creation of the living trust is one more in a long list of factors to consider.
Mr. Green is Counsel to the California Land Title Association. Mr. Smith is Vice President/Underwriting Counsel for Old Republic Title Company. This article originally appeared in the Los Angeles Daily Journal on Tuesday, June 16, 1998 under the title, "Land Guard - Ensuring That Title Insurance Protects Trustees, Successors." Permission granted for reprint.