A living trust is a popular estate planning tool designed to avoid probate. Because a living trust only governs property transferred into the trust, it will only avoid probate for property that you transfer to the trust. Trust funding is the process of transferring property from your name, individually, into the name of your trust so that the property avoids probate at your death.
To transfer real estate into a living trust, you need a deed for each parcel of real estate that you want to transfer into the trust. There are several different types of deeds, and many property owners have questions about the type of deed they should use to transfer property to a living trust.
This article explains why many attorneys consider special warranty deeds—also known as grant deeds, covenant deeds, or limited warranty deeds—to be the preferred deed type for transferring property into a living trust.
Types of Deeds
Most deeds are named after the warranty of title they provide. A warranty of title is a guarantee by the person transferring the property (the grantor) that the property is free and clear of all title issues. Common title issues include boundary disputes, undisclosed mortgages or other liens, and claims by other parties to own some or all of the property. If title issues arise, the person receiving the property (the grantee) may bring a legal claim against the grantor for breach of warranty of title.
As explained in our discussion of warranties of title, there are three basic warranty options:
- Full Warranty – A warranty deed—also known as a general warranty deed—provides an absolute guarantee that there are no problems with title. The grantor is responsible for all undisclosed title issues, including those that arose before the grantor owned the property.
- Limited Warranty – A special warranty deed also provides a warranty of title but limits the warranty to the time period that the grantor owned the property. The grantor is not responsible for title issues relating to the actions or inactions of previous owners.
- No Warranty – A quitclaim deed or deed without warranty provides no warranty of title. The person receiving the property assumes all risk for any title issues.
Any of these options could be used to transfer property to a living trust, but many attorneys recommend using a deed that provides a limited warranty—such as a special warranty deed, grant deed, or covenant deed—in order to preserve title insurance.
Title Insurance Considerations
Because of the role of title insurance in real estate transfers, the deed you use should take title insurance into account. Title insurance protects the named insured from claims arising from title issues. If you took out a loan to purchase the property, your lender probably required a title insurance policy as a condition of the mortgage.
A special warranty deed helps preserve title insurance protection after the property is transferred to the trust. It provides a link from the trust back to you. If a claim arises regarding the property, the trustee of the trust may invoke the warranty provided by the special warranty deed and look to you to resolve the title issue. In that scenario—assuming that you are insured under a title insurance policy—you can file a claim against your title policy and the title company will become responsible for resolving the issue. And even if you are not insured by a title insurance policy, you are in no worse position than you were before you transferred property to the trust.
Compared to other deed types, many attorneys believe that special warranty deeds are the best tool to optimize title insurance protection:
- Unlike general warranty deeds, special warranty deeds create no greater risk than before the property was transferred into the trust. If you had not transferred the property into the trust, you would have been responsible to resolve any title issues and could rely on your title insurance policy to protect against those issues. The special warranty deed simply preserves that arrangement after the property is transferred to the trust.
- Unlike quitclaim deeds, special warranty deeds connect the trust to your title insurance policy. With a quitclaim deed, you would not be responsible for any title issues, and therefore your title insurance company would not be responsible to help resolve any claims against title.
The ability to preserve title insurance coverage without creating additional risk makes special warranty deeds the preferred deed type for many transfers to living trusts.