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.

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.

Asset Protection for Nevada Business Owners

Many business owners do not take appropriate measures to protect their personal wealth from business liabilities until that wealth is in jeopardy. Once you are involved in a lawsuit or being pursued by creditors, it is usually too late to employ strategies to protect your business or personal assets. Nevada business owners have several asset protection options they can implement to protect their assets, including:

Practice Asset Segregation – This goal of this strategy is to minimize the number of assets held by you, personally, or the business, while still maintaining control. Shifting some of the equity from your business into a separate entity can provide added security against potential liabilities, as well as often provide tax savings.

Examples of this strategy might include:

    1. If you own the building from which your business operates, form a limited liability company (“LLC”), then transfer the land and building into the LLC and have your company rent/lease the building from the LLC.
    2. Transfer ownership of equipment, intellectual property, and/or other assets into separate entities and then lease/license the assets back to your business.

The benefit of this strategy is that only part of your business assets are at risk to a business creditor.

Use Series LLC’s – Series LLC’s are a type of LLC permitted by Nevada law, which allow the creation of a LLC that has an indefinite number of “Series”. The assets and liabilities of each Series are separate and distinct from the LLC and the other Series. The Series LLC is more efficient and cost-effective than a typical LLC, as the owner can create or terminate an individual Series without additional fees or reporting requirements to the state. In the asset segregation example above, a business owner could place the operating business in one Series, the land and building in another Series and the intellectual property in a third Series, rather than forming separate LLC’s to hold each asset.

Set-up an Asset Protection Trust – If properly set-up, an individual’s personal property assets, including the stock or membership interest of the business, can be placed in a Nevada Asset Protection Trust. The assets held by the trust can, after a two-year period, be completely protected from creditors of the business and personal creditors that are attempting to reach your personal assets. However, this is not something that can be done on the eve of litigation. Advance planning is critical and should be done with the guidance of an experienced business and estate planning attorney.

Establish a Captive Insurance Company – Captive Insurance Companies have been around for quite a while, but only fairly recently have become a tool utilized by small and medium-sized business for self-insurance, asset protection and tax mitigation purposes. The fact that over 90% of Fortune 500 companies currently have a captive insurance company is a testament to the usefulness of this mechanism for businesses. A few of the most attractive features of a Captive are deductive to the Company and then are that up to $1.2 Million in annual premiums paid by the Company to the Captive are not taxable to the Captive at the Federal or state level for income tax purposes, and all of the premiums paid into the Captive are 100% protected from creditors of the business. As the owner of the Captive Insurance Company, the profits of your business can be removed tax-free to the Captive and then can be grown on a pre-tax basis. The profits of the business transferred to the Captive can later be distributed from the Captive to you on a capital gains basis.

These are just a few strategies available to Nevada business owners to provide protection for business and personal assets. The most important thing to remember is that they need to be put in place before a creditor starts knocking on the door.

Nevantage Law Group focuses on asset protection strategies for Nevada business owners. Contact us for the legal expertise you need to protect personal assets from potential business liabilities.