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 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, excepting 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.