Beware: Transfer of Real Property to Entity May Void Title Insurance Policy

Many people these days are transferring real property to a trust or an LLC for asset protection or estate planning purposes. If you have recently done this or are planning to, there is something that you should know. The type of deed by which the real property is transferred is extremely important.

Real property is transferred by deed. Deeds come in a variety of forms including General Warranty Deeds, Special Warranty Deeds, Bargain and Sale Deeds, and Quitclaim Deeds. Each of the General Warranty Deed, Special Warranty Deed, and Bargain and Sale Deed contain warranties regarding the title to the property, which are provided by the Grantor to the Grantee. A Quitclaim Deed, on the other hand, makes no warranties. In practical terms, the Quitclaim Deed only conveys the interest held by the Grantor.

While there is not a lot of legal precedent regarding this topic, a Michigan Appellate Court was presented with this issue. In that case, the 100% shareholder of a corporation purchased a building. The title insurance policy issued for the property named the corporation as the insured. For estate planning purposes the property was transferred by Quitclaim Deed from the corporation to the shareholder’s wife. After the transfer to the wife, it was discovered that the property was burdened by an undisclosed easement, and the corporation sued under the title policy.

The Court found that upon execution of the Quitclaim Deed transferring the property from the corporation to the wife that the coverage under the title insurance policy terminated. The Court stated that the policy was terminated because the corporation did not retain an interest in the property. A Maryland Court has also held that a similar transfer by a Special Warranty Deed voided the title policy.

In each case, the Michigan and Maryland Courts would have likely ruled differently if the property was transferred by General Warranty Deed. A General Warranty Deed provides specific warranties from the Grantor to the Grantee that the Grantor will forever defend the Grantee from and against any defects existing in the title to the property, except the exclusions that are mentioned in the title insurance policy. Therefore, if the properties in the above cases were transferred by a General Warranty Deed, the Grantee would sue the Grantor for the defects in title based on the warranties made in the General Warranty Deed, and the Grantor would sue the title company under the title policy.

For little or no additional time or expense a General Warranty Deed can be utilized in favor of a Quitclaim Deed, which will likely insulate the downstream Grantee in the event of title defects. Contact the attorneys at Nevantage Law Group to discuss the best way to transfer your real property to a trust or LLC.

Using a Nevada LLC to Protect your Personal Property

Your personal property is essentially any item that you own besides real estate. Your car, your boat and your bank account are examples of personal property. A record of the owner of some personal property assets is typically maintained such as the title to your car, stock certificates or title to intellectual property, while there is no record of the owner of other assets like your household furniture or your personal effects.

From an asset protection standpoint, some assets are more attractive to creditors than others. Naturally, those assets that are most valuable are of particular interest. However, the liquidity of the assets is also an important factor considered by creditors that are determining which of your assets to target to satisfy the judgment or lien they have against you or your business.

Over the past 10 – 15 years, the limited liability company (“LLC”) has become the entity of choice for entrepreneurs and business owners for a number of reasons. Most people do not think of utilizing an LLC as a holding company, but they should. For many of the same reasons that the LLC has become the most popular entity for business owners, LLCs can be effectively used to hold/shelter your valuable personal property.

Nevada law provides that an LLC may be operated solely for the purpose of holding investments and managing assets. This quality sets the Nevada LLC apart from those of most other states, because in other states an LLC is required to have a business purpose. In other words, the LLC must be utilized to operate a restaurant, nail salon or conduct some other business activity. That is not to say that using a Nevada LLC to hold personal property in another state is a cure-all for asset protection purposes. Nonetheless, with careful planning and drafting such protection is available to residents of states other than Nevada.

Once the LLC is set-up with the Nevada Secretary of State and the organizational documents are in place, assets that are transferred into to the LLC receive the same asset protection that a business would. The likelihood of the LLC actually getting sued is minimal because the LLC is not likely doing anything that would expose it to liability. In the more likely circumstance that the owner (member) of the LLC gets sued personally, and a creditor seeks to satisfy the judgment with the assets of the LLC, the only remedy available to such creditors would be a charging order. The charging order does not entitle the creditor to anything except distributions from the LLC, and the LLC can be structured/managed such that distributions will not likely be immediately forthcoming.

A relatively small amount of money can go a long way toward protecting your assets, and the time to put this firewall in place is now – not when the creditors are knocking on the door. Contact the attorneys at Nevantage Law Group to discuss how a Nevada Investment Holding LLC can protect your personal property.