Essential Guidelines for Transferring Real Property to Trusts and LLCs

Real property often forms the bedrock of many estate plans, requiring careful attention due to its complexity. Unlike distributing cash or family heirlooms, real estate transactions involve mortgages and insurance, making them more intricate. Take it from me, an estate planning attorney: it’s crucial to handle these transactions carefully, especially when transferring property to a trust or to entities like limited liability companies (LLCs). Here are three common mistakes to avoid when managing real property transfers:

 1. Navigating the Due-on-Sale Clause

Mortgage agreements typically include a due-on-sale clause, which demands full repayment if the property is sold or transferred. The Garn–St. Germain Depository Institutions Act of 1982 exempts certain transfers, such as those to an inter vivos trust, from this clause. However, transfers to an LLC or other entities may trigger it. To avoid complications, always secure written approval from the lender when dealing with these transfers.

 2. Preserving Title Insurance

When transferring property to a trust or LLC, the title insurance policy may not automatically cover the new entity, potentially voiding the coverage. For instance, in Kwok v. Transnation Title Insurance Co., a transfer from an LLC to a trust voided the family’s title insurance policy. To avoid such issues, clients should obtain an endorsement from their title insurance company to include the new or additional insured parties, which is often available for a nominal fee.

 3. Updating Property Insurance

After confirming the transfer’s viability from a mortgage and title insurance perspective, it’s essential to notify the property insurance company about the title transfer. This ensures that the trust and trustees are added as insured parties, maintaining coverage for losses, damages, and liabilities. Failing to update the property insurance can result in a loss of crucial protections.

 Understanding Real Estate Transfers in Estate Planning

Real estate transfers within estate planning can be complex, but understanding these details helps prevent issues and safeguards clients’ interests. For personalized guidance on real estate title issues or to discuss your estate planning needs, call our estate planning law firm at (949) 334-7823 for a free consultation. Let us help you secure your estate’s future with expert advice and customized solutions.