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Unintended Consequences Of Transferring Title To Property In And Out Of An LLC

You May Have Just Voided Insurance Coverage

So your lawyer says, "Form an LLC to hold your property," and being the good lawyer that she is and you being the good client that you are, you form a limited liability company and transfer your real property holdings into the name of the LLC.  You're well on your way to building your real estate empire.

Who needs the Seven Secrets of How to Make Money Investing in Real Estate for three easy payments of $39.99?  You've just learned Secret Step No. 1 for free!

And no, as far as I know, there is no such thing as "Seven Secrets ..."   I made that part up just to make a point, but then you already knew that, didn't you?  Enough of getting sidetracked.  Let's get back to the story.

So, also being the prudent real estate investor that you are, you buy title insurance on the property you've now placed in the LLC.  In case you weren't paying attention before, that's Secret Step No. 2.  Feel free at any time during this lesson to send in your first payment.

And it's a good thing you did buy that title policy, because now your neighbor claims that easement you supposedly owned over his property is invalid.  But let's not get ahead of ourselves too far here.  In the meantime (somewhere between Secret Step No. 1 and Secret Step No. 2  you decided to refinance the property like the rest of the country and get some cash out.  In order to accomplish that refinance, however, your banker said, "We don't loan money to LLCs, so you're going to have to transfer that property out of your LLC and into your individual name or the name of your trust."

Or he said something like that, especially in a deep voice.

So, now you dutifully transfer the property out of the LLC and into the name of your family trust.  After all, your banker is smarter than your lawyer, isn't he?  Perhaps not.  Now that your neighbor is upset with you over that easement, you figure it's time to submit the claim to the title company and let them handle it.  After all, that's what you paid for, right?

There's just one little problem.  Well, maybe two little problems.  Actually, let's make that two big problems.

First, the title insurance policy was issued in the name of the LLC.  Second, you made the transfer of the title to the property without notifying the title company. 

That, or something very close to it, is what Patrick Man Lee Kwok and his wife Maria Oi Yee Kwok did.  Actually, they voluntarily transferred the property out of the LLC into their family trust (again not notifying the title insurance company) due to some construction activity, but my point is the same no matter what the mechanism used.

By now, you see the problem.  When the Kwoks submitted their title claim to the title insurance company, the title company essentially said, "Who are you?  You are not our insureds.  Your LLC is our insured, and it doesn't own the property anymore or have an interest in the property." 

Or something like that, especially in a deep voice.

The appellate court that heard the case agreed with the title company and denied coverage to Kwoks.  So, if you're transferring property in and out of an LLC for any reason, check your title insurance coverage. 

And by the way, don't forget to check your business or homeowners insurance policy, earthquake policy and flood insurance policy.

Printer friendly page Permalink Email to a friend Posted by J. Craig Williams on Wednesday, February 11, 2009 at 21:33 Comments Closed (0) |
 
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