Could You Lose Your Title Insurance?

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Question:  I recently heard that I may have lost the title insurance coverage on my home when I placed it in my revocable trust as part of my estate plan.  I was horrified by this because it is a wonderful probate avoidance technique that my attorney recommended.  I appreciate your help in this matter and I think it would be of great interest to the general home-owning public.

Answer:  There are a number of reasons why you might want to avoid probate.  Probate is expensive, time consuming, managed impersonally by a judge in a court, and public.  By placing your assets in a living trust, your successor trustee, upon your death or disability, can step in and take over for you and avoid probate.

Living trusts are very common and are often recommended by estate-planning attorneys.  It would be a shame to lose your title insurance simply because you transferred your home into your living trust.

I asked Kyle Krasa, an estate-planning attorney in Pacific Grove, for his opinion.  He said: “There are some title insurance policies, particularly pre-dating 1997, that state when a property is transferred – even into a living trust – the coverage is void.  Most title policies dated after 1997 do not contain that language.  If you want to really cross your “t’s” and dot your “i’s”, it would be best practice, particularly for polices pre-dating 1997, to review the policies to check for that cancellation language upon transfer.  If the language exists, request that the title company issue a new and updated policy.

However, the likelihood of a title company pressing the issue is very small.  For decades, all over the country, there have probably been millions of transfers of properties to living trusts.  The issue rarely comes up.  Furthermore, most clients can’t even find their title policies in the first place. 

The accepted best practice from an estate planning perspective is to transfer real properties into trusts to avoid probate and conservatorship.  I think you risk much  more by not transferring real properties into trusts then by doing what is the commonly accepted practice.  The chances of probate or a conservatorship when a property is not in a trust is 100%.  The chances of a title insurance issue because you transferred property into a trust  are probably miniscule by comparison.

Other “half-measures” such as listing the real property as a trust asset but not actually titling it to the trust might cause more problems.  While it is always prudent to review your title insurance policy to make sure that transferring your real property into your trust does not cause any unintended consequences, it is still the best practice overall to transfer your real properties into your living trust.”

Please do not take this column as tax or estate planning advice. For advice on your personal situation, see your attorney.  

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment manager and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA  93940 or email them to ken@montereypw.com.