Be careful when transferring real estate to related parties. Often times, real estate owners purchase a property in the name of a limited liability company or the name of a spouse for various reasons such as liability protection or credit problems. Later, the owner transfers the property back to himself or herself, or into both spouses’ names. Before making such a transfer, review your title policy. The transfer may cause a loss of title coverage.
In the recent case of Kwok v. Transnation Title Insurance Company (2009) 170 Cal. App 4th 1562, that is exactly what happened. The plaintiff purchased a property in the name of their LLC. Later, they transferred the property to their family trust. An easement dispute arose concerning the property and they tendered the claim to their title insurance company. The title insurance company denied the claim on the grounds that its insured, the LLC, no longer had title. The policy contained a provision which allowed the policy to cover a transferee if the transfer happened by operation of law. However, since the transfer was voluntary, it was not a transfer by operation of law. Had the plaintiffs simply dissolved the LLC (as they later did after the transfer) and taken the distribution of the property in the dissolution, the title coverage would have continued.
If the problem is addressed before the transfer, it can often be resolved. Please keep this in mind before you transfer any real estate to a related party and it is your intent to maintain an interest in the property.