Cleaning house, a check-up on estate planning for your real property

Those who own real property in California (and other states) often transfer title to their living trust as part of their estate plan. The goal is to avoid probate, provide for efficient and private means of managing and dealing with property in the event of incapacity or death, and effectively achieve other estate planning goals. However, an estate plan is not a “set it and forget it” strategy, and the initial transfer of property to the trust is only the first step. There are important additional actions to ensure the estate plan has maximum effect. 

As we usher in a new year, it is a good time to review the legal status of the title to your home and other real property. Frequently when reviewing a new client’s existing estate plan, we discover that some of this follow up has not yet occurred. Below is a summary of what steps should be taken:

Newly purchased property

Most clients with a living trust formally transferred title to real property to the trust at the time of formation. However, unless clients are vigilant in taking title to newly purchased property in the name of the living trust, a subsequent trust transfer deed may be necessary to accomplish this. 

Best practice 

Ensure that your estate planning attorney has a complete list of all real property that you own, and that you (or they) have confirmed that title is properly vested in accordance with the estate plan in place. 

When refinancing goes wrong

What Can Go Wrong? 

Certain lenders do not like lending to trusts and require that the property be temporarily transferred out of a trust at the time of the refinance. Sometimes these lenders will help the owner transfer the property back into the trust after the refinance, but many do not or fail to properly record the deed returning the property to the trust.

One important purpose of transferring real property to a trust is to avoid the need for a probate administration following death. Probate administration is a lengthy, expensive and public process. It is common that we initiate court action (either probate, or a shorter process to confirm title in the living trust when it is available) because a property was transferred out of trust for refinancing and never returned. 

Best Practice 

Any time a property owner borrows against their property or refinances, they should note whether the property is transferred out of trust as part of the process. Lenders who do not automatically assist with transferring it back to the trust may be willing to help if asked. If not, your estate planning team can help you record a deed to transfer it back.  We recommend checking title to your home every few years to ensure title is held as desired. Your estate planning attorney can help you with this process. 

Homeowners' insurance coverage

Homeowners’ Insurance – What Is It? 

Homeowners’ insurance typically protects the owner from damage to the dwelling and other structures, loss of use of the property, damage to personal property stored within, and personal liability for injury to visitors to the property, subject to any limits or exclusions set forth in the policy.

When an owner transfers title to their home into a trust, an important next step is to add the trust as a named insured under the homeowners’ policy and any applicable umbrella policies, because a failure to do so can result in disaster. Consider the following scenarios where the trust was not added as an additional insured:

1. The house burns down or is flooded.  The owner submits an insurance claim only to be told that the structural damage is not covered because the trust is the record owner of the property and is not an insured under the terms of the policy.
2. A visitor trips and breaks their pelvis, then sues for damages.  Both the original owner and the trust are named in the lawsuit. The policy covers the individual owner for the cost of litigation and damages, but the trust is separately responsible for its own costs of litigation and damages. 

Why Extend Coverage to the Trust?

It may seem that establishing a new policy in the name of the trust is the best approach, but the original owner may still be held personally liable for certain liabilities, and the contents of the home may not be owned by the trust. Consider Scenario No. 2 above: In a lawsuit, the plaintiff will typically name all known parties (the trust, the trustee individually, and the creator of the trust, etc.) as defendants to see what sticks.

We recommend continuing an existing policy but adding the name of the trust as a named or additional insured party. Bear in mind that the trust should be referred to with specificity – the complete name and date of the trust and the name of the current trustee. If there is a subsequent change of trustee, we recommend that the policy be updated to replace the name of the prior trustee with the name of the successor trustee. 

Once the trust is added as an additional insured, both the trust and the individuals who beneficially own the property should be protected by the homeowners’ policy. 

Best Practice 

If you own real property via a trust and are not certain that your homeowners’ policy covers the trust, we encourage you to review your existing policy right away. If the trust is not covered, contact your insurance agent and ask them to add your trust as an additional insured on the policy and find out if any additional steps are needed for maximum protection. In any case, we recommend you review your policy every year at the time of renewal to ensure it continues to identify your trust as an additional insured. 

Title insurance coverage

Title Insurance – What Is It? 

In virtually every case, when real property is purchased the buyer receives a title insurance policy, which protects the buyer against liens, defects and encumbrances that weren’t known at the time of the purchase up to the policy limit (typically the purchase price). There is a one-time premium, typically paid through escrow, and the policy permanently insures title up to that point. 

An important role of title insurance is to ensure that the owner has “marketable title” so that when the owner later sells or borrows against the property, lenders, buyers and other title companies will accept their claim of ownership.

It is easy to confuse title insurance with homeowners’ insurance. In brief, title insurance protects against defects in title from the beginning of the property’s history to the date of the policy’s issuance, whereas homeowners’ insurance usually protects the property and its contents from theft, vandalism, liability claims, etc. that occur during the term of the policy.

Continuation of Coverage to Trusts 

Most policies issued today have provisions that automatically extend insurance coverage to trusts (as well as to the beneficiaries upon the death of the original owner), but historically this was not the case; it is important to review each policy to determine whether the trust receives coverage.

Fortunately, even if a policy does not automatically cover a transfer to trust, it is relatively easy to obtain an endorsement that names the trust as an additional insured. This endorsement is known as a “107.9 Endorsement.” Typically, this entails contacting the title company who issued the original policy to request the endorsement, then sending them an endorsement fee (typically around $100) along with a copy of the recorded deed that transfers title to the trust. It is important to send a copy of the endorsement to your estate planning attorney and/or keep a copy somewhere secure in your own files.

Continuation of Coverage to Entities 

Many property owners subsequently transfer title from their trust to a limited liability company (LLC) or other legal entity. Generally, title insurance policies do not automatically extend coverage to legal entities. While some allow endorsements, at times the only way for the legal entity to obtain coverage is to purchase a new policy.

Best Practice

If you own real property via a trust and are not sure if your title insurance policy covers the trust, we encourage you to review your policy right away. If the trust is not covered, contact the title company that issued the policy and request a 107.9 title endorsement. Otherwise, we recommend reviewing your title insurance policy any time you transfer the property (to a trust or otherwise) to determine if the transferee is automatically covered, or if an endorsement or new policy is needed. Your estate planning attorney can assist you with this process.

Homeowners’ property tax exemption

Homeowners’ Exemption – What Is It? 

Every taxpayer who owns their principal residence in California is eligible for the homeowners’ exemption, which allows $7,000 of assessed value to be excluded from property tax. The exemption does not significantly reduce an owner’s property taxes because the exemption amount has not changed since 1974. However, the exemption is still beneficial because the savings add up over time.

According to the Los Angeles County Assessor, “Remarkably, nearly one in three homeowners in Los Angeles County do not take advantage of this tax savings’ program, leaving $30 million unclaimed each year. Across the County, an additional 435,000 families can be saving on their tax bills.” 

Continuation of Exemption After Transfer to Trust 

Any time title to one’s home is transferred, even when to a living trust, the county terminates the existing homeowners’ exemption and typically mails the new owner of record a Claim for Homeowners’ Property Tax Exemption form. Many owners do not understand this form and disregard it. 

Though a trust is not a person, so long as a beneficiary of the trust or the person who created the trust is an occupant of the property, it is eligible for the homeowners’ exemption.

What Other Purposes Does It Serve?

Under current law, claiming the homeowners’ exemption is a prerequisite to claim other benefits. Proposition 19, which became effective February 16, 2021, allows a limited exclusion from reassessment for certain transfers of a primary residence between parents and children or grandparents and grandchildren. However, the transferee must file for the homeowners’ exemption within one year of the transfer date to receive the benefit. 

Proposition 19 also allows homeowners who have a severe and permanent disability or who are age 55 or older to transfer their primary residence’s assessed value to a replacement property so long as both the original property and the replacement property qualify for the homeowners’ exemption. The easiest way to prove eligibility is to file a claim for homeowners’ exemption.

Best Practice 

To determine whether or not you have already claimed the homeowners’ exemption, most county assessor websites allow you to look up assessment data on your home, which typically includes whether or not any exemptions currently apply. If your home does not already receive the homeowners’ exemption, apply by February 15 to receive the full exemption in 2023. However, even if you miss the deadline, you will get a prorated amount in 2023 and the full exemption in future years.

For real property in Los Angeles County, go to https://portal.assessor.lacounty.gov/ and look up your property by address or assessor’s parcel number. The top section will usually say either, “Exemption: Homeowners’” or “Exemption: None.”  To apply, the claim form should be posted on the county assessor’s website with filing instructions.  Your estate planning attorney is available to help check the status of your homeowner’s exemption and assist you in completing necessary forms to claim it.

Out-of-state real property and the homestead exemption

Most of the issues identified above also apply to real property in other states held in trust, though the rules and processes may vary. In addition to the issues raised above, many states have generous homestead exemptions that help shield a home from some creditors. While this exemption is limited in value in California, some states such as Texas offer unlimited exemption but require language in a trust affirming the intent to qualify. Consult your estate planning attorney with questions about the homestead exemption or titling of your out-of-state real property.