Monthly Archives: May 2014

Title and Survey Contingency

Overview:  At the center of any real estate transaction is the assumption that that the Buyer is getting what they think they are getting, with respect to the property.  Accordingly, every buyer entering into a purchase agreement must make some provision to address potential title and survey concerns.  While prior or outdated title policies can provide some peace of mind, these are not adequate to protect Buyer’s interest in the property.  Buyer needs to obtain an updated title commitment and preferably an updated survey of the property.  To this end, the sale agreement should contain a provision clearly specifying that Buyer’s obligation to close on the transaction is contingent upon their approval of a title and survey report or commitment dated after the date of the agreement.  On Seller’s end, while you cannot expect to bypass this contingency, Seller can and should seek language in the contingency that is limited in its application and very clear in its specifics.

Suggested language (Buyer):   A purchaser’s title and survey language should be detailed and somewhat extensive in order to adequately protect the buyer against a variety of potential title and survey concerns.  A properly drafted contingency should include the following provisions:

(a)    Purchaser may purchase survey and title reports

(b)   Purchaser to notify seller of objectionable or problematic title/survey matters

(c)    Seller should have a period to investigate/correct

(d)   Purchaser may elect to proceed regardless of the problem or may terminate the agreement

(e)   Satisfaction of reports determined solely by Purchaser

Suggested language (Seller):   Seller cannot expect to eliminate a title and survey contingency.  However, a Seller should be diligent in not giving the Buyer an absolute right to terminate the agreement for reasons that are not overly burdensome.  A Seller should consider implementing the following provisions:

(a)    Purchaser should be obligated to immediately notify Seller of title/survey objections

(b)   Purchaser’s satisfaction of reports should be held to a standard of reasonableness

(c)    If Seller cures the problems, Purchaser should be obligated to proceed to closing

(d)   Purchaser should have a limited timeframe in which to raise title objections

Trusts: Planning and Preserving for the Future

I.    Revocable Living Trust

Description: Trust created during your life into which you transfer the bulk of your assets.  This trust can be revoked at anytime by the grantor (i.e. you, the creator) of the trust.  You typically serve as both the “trustee” managing the assets, as well as the “beneficiary” for the benefit of whom the assets are being held/managed.  Administration and ownership is not much different than individual ownership.

Benefits:

(i)                  assets in the trust avoid the probate process

(ii)                incapacity planning

(iii)               provides distribution plan (in a similar manner to a will)

(iv)              allows for control of assets after death

(v)                can be combined with A-B trust and other types of trusts (see below)

You Should Consider One Any of the Following Apply:

(i)                  you have significant assets

(ii)                you have assets which require active management

(iii)               you want your assets distributed in a manner other than outright gifts

(iv)              you want to simplify your estate plan and avoid probate

II.   Testamentary Trust

Description: Trust created in a manner so as to come into existence only at the time of your death.  The terms of a testamentary trust are typically embodied in a will.  The trust never exists while you are living.  Testamentary trusts can also be an additional extension of part of an already-existing revocable living trust.

Benefits:

(i)                  Distributes property according to the trust provisions

(ii)                Typically avoids an outright transfer to the beneficiaries

You Should Consider One If:

(i)                  you have young or immature beneficiaries

(ii)                you have older or incompetent beneficiaries

(iii)               you have disabled beneficiaries

(iv)              you want to maintain extensive control over “gifted” assets

III. “A-B” Marital Deduction Trust

Description: Trust created to minimize gift and estate taxes for married couples.

Benefit: Avoidance of significant estate taxes

You Should Consider One If Both of the Following Apply:

(i)                  you are currently married

(ii)                you have significant assets

IV.  Discretionary Special Needs Trust

Description: A trust created for the benefit of an individual receiving state or federal government benefits.

Benefit: Provides assets to a disabled individual without affecting their eligibility for government benefits.

V.   Irrevocable Trust for a Minor

Description: A trust funded for a minor in a manner that qualifies the donor for the annual gift tax exclusion.  The trust/gift cannot be revoked and must meet several IRS guidelines.

Benefits:

(i)                  allows for continued control over the gift by the donor (as opposed to an outright gift)

(ii)                gift still qualifies for annual gift tax exclusion

VI.  Revocable Life Insurance Trust

Description: A trust established to be the owner of a life insurance policy and the beneficiary of the policy’s eventual insurance proceeds.  The trust can be revoked at any time.

Benefits:

(i)                  allows for control/supervision of life insurance proceeds

(ii)                allows for divided distribution of life insurance proceeds among multiple recipients

(iii)               avoids probate

(iv)              flexible and revocable

VII. Irrevocable Life Insurance Trust

Description: A trust established to be the owner of a life insurance policy and the beneficiary of the policy’s eventual insurance proceeds.  Cannot be revoked and you cannot serve as the trustee. Major advantage is elimination of estate taxes on the insurance proceeds.

Benefits:

(i)                  allows for control/supervision over life insurance proceeds

(ii)                allows for divided distribution of life insurance proceeds among multiple recipients

(iii)               avoids probate

(iv)              avoids all estate taxation on the life insurance proceeds

What’s a Deed and What’s the Difference?

In the world of real estate transactions, the term “deed” can have a number of different meanings.  In my law firm’s representation of real estate investors, developers and property owners generally, it is not uncommon to find myself explaining to a client the difference between these various types of “deeds.”  This somewhat ambiguous term can prove to be understandably confusing even to experienced real estate investors and long-time property owners.

This article will help remove some confusion from these topics by detailing six important types of “deeds.”  It cannot be emphasized enough that each of these instruments is unique from each other.   These are NOT interchangeable terms and are NOT interchangeable documents.

 

Quit Claim Deed

Quit claim deeds are, in many ways, the simplest type of deed in our discussion.  These are sometimes mistakenly referred to as “quick-claim deeds,” which term is incorrect and inaccurate.  A quit claim deed states that the party executing (signing) the document transfers all of its interest that it may have in a particular parcel of real estate to another party, as named in the document.  In other words, it is a transfer or conveyance instrument.  However, a quit claim deed makes no warrant or claim that the party conveying its interest actually has title to the property to begin with.  Instead, it simply conveys all of the interest (no matter how existent or non-existent) that the party has in the real estate. A quit claim deed is most often used in situations where there are questions or disputes regarding title, in inter-family transfers and in the funding of trusts or corporate entities.

 

General Warranty Deed 

A general warranty deed conveys an ownership interest in real estate.  However, unlike a quit claim deed, by signing a general warranty deed, the seller/grantor makes the following covenants:

(1)    The Seller/Grantor owns the property

(2)    The Seller/Grantor has a right to convey the property

(3)    The property is free of encumbrances, except as noted

(4)    The Seller/Grantor will defend title against claims by all persons

Due to the covenants made by the Seller/Grantor, a general warranty deed is the strongest form

of conveying property.  As a purchaser, a general warranty deed is the most desirable instrument by which to obtain an ownership interest in property.[i]

 

Special Warranty Deed

In a similar fashion to a general warranty deed, a special warranty deed conveys an ownership interest in real estate with certain covenants by the seller/grantor.  These covenants are as follows:

(1)    The property is free and clear of encumbrances, except as noted

(2)    The Seller/Grantor will defend title against all claims of persons making claims under the Seller/Grantor (in other words, parties claiming to have derived an ownership interest from the Seller/Grantor)[ii]

 

Beneficiary Deed

A beneficiary deed is used to convey property upon the death of the owner.  The instrument is signed (and recorded with the local recorder of deeds) during the owner’s lifetime and names the party to receive the property, but the transfer does not actually occur until the owner dies.  Specifically authorized by statute in Missouri (see Ch. 461.025 RSMo), a beneficiary deed is an effective estate planning tool.  A beneficiary deed only transfers property upon death and is not effective to convey any present interest while the owner remains living.


Deed of Trust  

A deed of trust is an instrument by which a lender or similar party takes a “security interest” in a parcel of real estate.  Practically speaking, a “security interest” is not an immediate outright transfer of the property, but instead merely gives the lender/grantee the right to foreclose on and sell the property if the borrower/grantor fails to keep up its end of a related loan agreement.  Accordingly, a deed of trust is typically prepared in conjunction with a loan and promissory note. A deed of trust is similar to a mortgage.

Legally speaking, the deed of trust actually transfers the property to a named “trustee” who allows the current owner to continue to use the real estate, except that if and when the borrower/grantor defaults on the related loan, the trustee would foreclose on the property, essentially acting on behalf of the lender/grantee.  Summarized simply, a deed of trust is a mortgage-like document, used in Missouri in place of an actual mortgage.

 

Deed of Release

A deed of release is typically signed by a lien holder or mortgagee (i.e. a lender) when a lien on property is going to be released.  For example, a bank (who has had a lien on property in the form of a deed of trust) would execute a deed of release after the underlying loan is paid off by the debtor. The deed of release effectively cancels the deed of trust.  Missouri law requires that a lien holder provide a deed of release within 15 days of a borrower paying off the related loan and making a formal request for a deed of release (see Ch.  443.130 RSMo).  Once recorded with the local recorder of deeds office, a deed of release terminates the lien holder’s interest that had been created by the deed of trust.

 

 

What are the General Benefits of a Trust?

A discussion of the benefits of a trust merits a lengthy and entirely separate article.  However, there is some value to understanding a few of the various reasons why someone would want or need to establish a trust.  These benefits are entirely dependent on the details of individual circumstances.

(a) avoidance of the cumbersome (and expensive) probate process

(b) avoidance or reduction in gift and estate taxes (so called “death taxes”

(c) providing for children and other descendants in an organized and prepared manner

(d) increased control over property upon death

(e) creation of incentives for behavior and accomplishment among descendants

(f) increased flexibility regarding planning for incapacity and death

(g) creation of on-going  funding for charitable or religious organizations

(h) potential reduction in tax burden on life insurance proceeds

(i) privacy in financial and personal affairs regarding distribution of property