By: Lance T. Denha, Esq.
The next time you think about transferring title, be certain how the type of conveyance will affect your title insurance policy.
Most investors have either heard of or use a Quit Claim Deed as a method of granting title to another person or entity (i.e. LLC, S-Corp, Trust, etc.) This method is of liability protection is popular. The reason it is popular among individuals is primarily due to the fact that mostly all conventional lenders require an investor to guarantee and take title to property in his or her personal name. However, once a loan is closed, investors typically use a Quit Claim Deed to move title into an entity with some form of liability protection.
What is the difference between a Quit Claim Deed and a Warranty Deed? A Quit Claim Deed does not give a statement of warranty, leaving very little protection to the actual transfer. The Grantor essentially tells the beneficiary of the document that it does not warrant what (s)he owns, but is transferring the property the grantor thinks and assumes (s)he owns. There is no recourse if there is a problem with the title.
As an example, let’s assume an investor purchased property and received a Warranty Deed and owner’s title insurance policy. S(he )then transfers the property to their spouse, a living trust or a related corporation for estate planning, tax or business purposes. After the transfer, a title defect is discovered. If they transferred the property via Quit Claim Deed, the grantee has no recourse against you, since the property had been Quit Claimed. Therefore they would lose their right to make a claim under their title policy. On the other hand, if you transfer the property by Warranty Deed, upon discovery of the title defect, the grantee may maintain an action against you for breach of the title warranties inherent in a Warranty Deed. This could then permit you, as insured under your title insurance policy to make a claim.
I know you may have heard and will continue to hear individuals in the real estate field and professionals talk about Quit Claiming property out of your personal name for asset protection. While this is very well true, the potential pitfall to keep in mind when doing so is that it may very well nullify the title policy that was obtained initially when the property was first purchased by that particular individual in his/her personal name. Once the title of the property is conveyed to the new entity, the Quit Claim warrants nothing for the new title holder which would be your entity! If a title issue where to arise after the property had been Quit Claimed to the new entity, it is highly likely that the title policy would not cover the entity’s claim.
As always, it is highly recommended to consult with an attorney before transferring title to any person or entity. Also be certain the attorney is asking the right questions to make the determination before transferring your property via Quit Claim Deed. It is also imperative as an investor that you ask the proper questions and confirm that any conveyance of property is done in the right manner and with the proper protections in place to preserve your rights under the title insurance policy.