Are you in the process of transferring property? Or maybe you're planning to transfer a property, or even multiple properties in the near future. If the answer is no, let’s just hypothetically say you’re looking to transfer your properties into a legal structure as part of your new asset protection plan. Can title insurance be transferred?
Ultimately, this is something most real estate investors will have to deal with at some point in their investing careers. Get this information now so you can stay on top of your business and be prepared when the time comes.
Let's talk about how to preserve your title insurance when transferring, step-by-step.
Any time you transfer property, you must consider the title insurance implications. Title insurance will generally being invalidated upon the transfer of the property. However, title insurance isn't invalidated if you transfer the property to a wholly owned LLC (an LLC that is completely owned by you, the person that also owns the property).
It also won't invalidate it if you add your spouse to title.
You may also transfer the property to an inter vivos trust where you are the settlor of that trust. This is the type of strategy that we'll be using with our anonymity land trust and we start transferring property.
As a real estate investor, you’re painfully aware of the cost of insurance for a property. The last thing you want to do is pay more money than is absolutely necessary for insurance.
Usually when you transfer a property, your hazard and title insurance expire. This typically happens because insurance companies are pretty good at looking out for their own best interests, and have the legal personnel to make sure these stipulations are made in your insurance contract. I know nobody enjoys reading contracts, but go ahead and check if you don't believe me. The vast majority of the time, property transfer means expiration for those types of insurance.
But never fear, smart investor friends: there is a way around this! You can use the oh-so-useful money-saving and anonymity-preserving land trust, a tool I've written about before here on Bigger Pockets, to preserve your title insurance as well. Here's how it works: if you transfer your properties into a land trust you’ll be able to preserve both your hazard and title insurance. This in addition any other insurances you might have for the property.
Land trusts are a common component of many asset protection plans because of their ability to give you total anonymity. And as a small bonus, you won’t have to worry about violating the due on sale clause when you transfer your property to a trust. Follow the link in the previous paragraph for much, much more information on these other uses of the land trust.
You might be thinking it sounds too good to be true. The skeptical among you may already be wondering what kind of legal backbends you'll have to do, and if there's a catch here.
Not at all. This is perfectly legal and honest tool, and something that investors can always take advantage of. If you're holding your breath waiting for a surprise gut-punch in the fine print, exhale. You aren't going to find it.
That said, you do need to have your ducks in a row regarding both the property and the trust. First, you must be the settlor of the property you’re transferring to preserve your insurance. You must also be the beneficiary of the trust you’re transferring the property in question into.
Before transferring any property, it's definitely a good idea to review any insurance policy you have. While you're doing this, pay special attention to your title insurance policy. It shouldn’t be too hard to find the part of your insurance contract dealing with this issue. If you're having issues with this, consult with an attorney. A business-savvy professional who deals with contracts regularly, such as an insurance agent, CPA, or other legal professional can also help in a pinch.
Usually, the land trust you want to transfer property to must meet your insurance policy’s criteria for transfer eligibility. If you’ve looked over the policy and you're still uncertain whether this is the case for you, it's time to check with your agent.
The good news is there’s a guaranteed way to make this transfer will work for you.
The most reliable method is fairly straightforward. All you need to do is add the land trust you plan to use as the beneficiary of your insurance policies. Adding your land trust as a beneficiary essentially guarantees that you'll get to keep your insurance.
This method is leaps and bounds better for you than getting a new insurance policy. Why, you ask? Because, as I’m sure you know, a new insurance policy would have to use the current value of the property. And thanks to a little thing called appreciation, which is usually a good thing for investors, the current value is almost certainly higher than it was when you bought it. And while that's good news if you plan to sell it, it's bad news if you're having to get a new insurance policy. It means you’d actually end up having to pay more, perhaps a lot more, than before. So you want to hold your policy to the last minute before being forced to renew.
First you’d have to pay to re-issue the policy, and since your property has probably appreciated in value, your policy will be more expensive. Second, if you're policy isn't already near its expiration date, you're unnecessarily costing yourself extra money. Extra money which could be used for much more pleasant things than insurance. This is why it's worth the effort to use the land trust method to avoid triggering the expiration clause in that crafty insurance contract.
Scott Royal Smith is an asset protection attorney and long-time real estate investor. He's on a mission to help fellow investors free their time, protect their assets, and create lasting wealth.
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