If you are buying a home and are wondering what the role of title insurance is, this article is for you. Title insurance policies protect buyers, real estate owners or lenders against any loss or damage they might experience because of liens, encumbrances, or defects that show up in the chain of title of the property. The “chain of title” reflects the various documents recorded for a specific property over the years. These usually include Deeds transferring the property from one owner to another, Deeds of Trust evidencing loans taken out against the property, Deeds of Reconveyance evidencing when a loan has been paid off in full, Deeds conveying easements, property line corrections, as well as tax liens, mechanics' liens, Lis Pendens (evidence of pending litigation affecting the property), etc.
Title Insurance differs from property/casualty Insurers (car, life, health, etc) in that casualty insurance assumes a risk for future events by collecting monthly or annual premiums, while title insurance insures that the “past” of the property is in good order – i.e., there are no defects in the chain of title which will prevent the new owner from selling the property freely, or which protect the new owner if he/she is sued by someone who also asserts an ownership interest in the same property. Title Insurance also protects against past fraud, forgery, liens, encroachments, easements, wild deeds (deeds belonging to other parcels of land improperly recorded in the chain of title of this property), and other defects in the chain of ownership. Title insurance is issued when ownership changes, at a one-time fee paid through escrow.
Buyers and lenders need title insurance to establish that the property they are involved with is insured against various title defects that will make a sale of the property difficult, or prevent the ability to obtain a loan, refinance, apply for a line of credit, etc., Sellers, buyers and lenders all benefit from ensuring that title to the property is free and clear from defects (referred to as “encumbrances of record”).
Title insurance is issued as part of escrow, when an escrow officer places a Title Order with a Title company. The Title company searches the public records including the County Recorder where the property is located, Federal and State agencies (including FTB and IRS), and County and City offices. A Preliminary Title Report is generated for review and approval. At close of escrow, any encumbrances of record flagged in the Title Report are resolved – meaning, liens and demands are paid - before funds are dispersed to the seller, and a title policy is issued to the new owner, along with a Deed conveying title of the property to the new owner.
Estate planning attorneys generally conduct a basic check of the chain of title to determine what the most recent form of title of the property is, before they convey it into a living trust. This is especially important if a property is owned by multiple owners in various shares/percentages. To ensure the chain of title remains clear, only the ownership interest actually owned by someone can be conveyed into their living trust. Also, it is important to discuss what happens to the remaining co-owners if one co-owner transfers their respective interest in Trust. For example, a joint tenant that conveys his or her interest in Trust causes the joint tenancy to be severed, thus converting it into Tenancy in Common – which in turn necessitates that the other co-owner also consider owning the property in trust, so as to avoid probate.
Title comes up also when inheriting real property. If a spouse inherits a home from his/her parents, how do they transfer it in a family Trust while at the same time preserving the “separateness” of the inherited property – and also possibly protecting it from the creditors of the other spouse? Adding the description “as the sole and separate property of” on a Deed denotes that certain property, even though owned by a family trust, only belongs to the spouse whose separate property it is. Oftentimes, to ensure the other spouse “gives up” any community property interest they might have, would also sign a Quitclaim Deed that is recorded denoting that such spouse “gave up” any and all community property interest they might have in the inherited (sole and separate) property of the other spouse.
Titling your property in trust has many nuances, and any time a document is recorded, property taxes may be reassessed by the County Assessor. Discussing property title with your estate planning attorney is very important to avoid inadvertently creating “encumbrances of record” in the chain of title, or to avoid inadvertently triggering reassessment of the property taxes when transferring property between family members or into a business entity (such as an LLC).
To learn more about owning your real estate in Trust or LLC, text us via our website to request a consultation with the Attorney.