“Kwok” Case Highlights Importance of Title Insurance in Estate Planning
Deeding a home or residence into the family trust is a standard estate planning move. Indeed, most planning clients choose to create a revocable trust and then transfer most of their assets, including all their real property, into the trust. But did you know that this standard maneuver could cause you lots of grief in the future by voiding your title insurance policy?a
Title insurance is what you buy when you purchase real estate. It protects you from later claims by others that the title to your property is not as stated in the policy. For example, if physical access to your property depends on an easement and the owner of the easement property later disputes the title to your easement, then your title policy will probably step in and save you tens or hundreds of thousands of dollars in litigation costs. Or, if the previous owner’s lender suddenly starts foreclosure on your property claiming that they weren’t paid at close of escrow, your title policy probably has the situation covered. Title claims such as these are rare, but if they come up and you are not covered with title insurance, then you are facing a real financial disaster.
Transferring your property into your trust could void your title insurance. Specifically, under the case of Kwok v. Transnational Title Ins. Co. (2009) 170 Cal.App.4th 1562, a couple’s transfer of title to their property into their revocable family trust voided their coverage under their “CLTA Standard Coverage” policy of title insurance. The couple, named Kwok, was left without insurance coverage. Consequently they were forced to bear hundreds of thousands of dollars in expenses that their policy would have covered. As the former owner of a title insurance agency, I have personally seen title insurance underwriters deny otherwise valid claims based on Kwok. The “Kwok” problem is not fatal to estate planning though.
So far, the Kwok case has only been applied to the traditional CLTA Standard Coverage form of policy. Newer forms of title policies, especially those issued in the last decade or so on residential property, have provisions that allow for transfer of title from individuals, like the Kwoks, to standard estate planning trusts. If Kwok applies to your title policy, you can fix the situation by purchasing a 107.9 “additional insured” endorsement your title insurer. If you are unsure of how to proceed, you should contact your estate planning attorney. If you haven’t started with your estate plan yet, make sure to mention “Kwok” when you first meet with your attorney.