Refinancing, Title Insurance and Your Living Trust

refinance mortgageMany of my clients have created a living trust in connection with their estate plan. I like to compare a living trust to a safe. A safe is designed to hold and protect assets that have been placed inside it, likewise, a living trust holds and protects assets that have been retitled into the name of the living trust.

I customarily prepare a General Warranty Deed for clients with a living trust. The General Warranty Deed transfers the title of the real estate from the individual into the name of the client’s living trust. If all the client’s assets have been transferred into the living trust, there will not be a probate proceeding upon the client’s incapacity or death.

Many of my clients had refinanced their homes due to low interest rates. As part of the refinancing process, many mortgage brokers had required my clients to remove their house from their living trust and transfer the title into their individual names. Some local title insurance companies had removed the house from the living trust and transferred the title to them by the use of a Quit Claim Deed.

Please note that you should not allow a title insurance company to remove your property from your living trust through the use of a Quit Claim Deed. If a Quit Claim Deed has been used to convey property from your living trust to you as an individual, it is possible that your title insurance covenants may have been severed.

Most homeowner’s title insurance policies are standard policies from the American Land Title Association (ALTA). If you read your title policy, you will discover a paragraph entitled “Continuation of Insurance After Conveyance of Title”. This paragraph states in part, “The coverage of the policy shall continue in force . . . only so long as the insured shall have liability by reason of covenants of warranty made by the insured in any transfer or conveyance of the estate or interest”. The use of a General Warranty Deed transferring title out of your living trust will preserve the protection under the title insurance policy.

When a title insurance company conveys your home out of your living trust by the means of a Quit Claim Deed, it can possibly terminate the coverage of your title insurance policy. The irony is that when you originally purchased your home, you obtained title insurance form a title insurance company and now the title insurance company can sever the coverage that it originally sold you by the use of a Quit Claim Deed.

Please remember that there are two parts to a title insurance policy: the owners title insurance policy and the lender’s title insurance policy. What is important to remember is that during the refinancing process the owner does not obtain a new title insurance policy. The new lender (mortagee) does obtain a new title insurance policy. The owner has to rely on the policy obtained when he/she originally acquired title to the property. Allowing a title company to convey your property out of your living trust by the means of a Quit Claim Deed can sever the coverage obtained under the original policy.

Many of my clients have refinanced and were never aware that the property was removed from their living trust, or that the title company did not prepare any new documents to transfer the property back into their living trust after it was removed. As there are many documents that are required to be signed at the refinancing closing, the title of the property is sometimes not closely reviewed. If you had previously refinanced your property, I would ask you to please review your documents to ensure that your property is still titled in the name of your living trust. If the property has been removed during the refinancing process, you may call my office, e-mail or fax me a copy of your deed and I will prepare a new General Warranty Deed on your behalf that will transfer your property back into the name of your living trust.

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