TRUSTS IN GENERAL:
What are they?
Trusts in themselves are not legal entities which can own, manage or sell property. A trust operates through one or more trustees, who usually are individuals but may be corporations. It is these trustees who hold legal title to the property for the benefit of the beneficiaries of the trust.
WHAT DOES A TITLE COMPANY NEED WHEN A PROPERTY IS HELD IN TRUST?
To be able to close, a title company needs to be able to review the client's Trust Agreement. When we are reviewing we look for three main things:
1. Who are the trustees?
2. What powers have they been given under the Trust Agreement?
3. What limitations, if any, were placed on those powers?
The biggest piece of the equation is getting a copy of the client's Trust Agreement, which can be a challenge as this document typically contains confidential information.
IDENTIFYING THE TRUSTEES
The Trust Agreement will outline the parties to the agreement. Typically we see the parties to be:
• "Settlor or Grantor": The party that is creating the trust and transferring property into the trust.
• "Trustee": The person responsible for management of the trust.
• "Beneficiaries": The parties on whose behalf the trust has been created.
These definitions can be all the same person or each definition can be a separate person.
The Texas statutes generally provide that a trustee of a trust has the power to sell, buy, encumber, and lease the property. The Trustee has a fiduciary duty to the trust beneficiaries in their management of the trust. A Trust Agreement can limit or expand the power of the trustee for management of the trust which is why the Trust Agreement must be provided to the title company. The Trust Agreement must be carefully reviewed to make sure that the power the trustee needs to complete the transaction is specifically given to the trustee.
Occasionally the initial Trustee is now deceased or has declined to serve as Trustee. We then have to look for the Successor Trustees in the agreement. Usually the Trust Agreement will provide for a successor trustee upon the death, disability or resignation of the original trustee. It is important to verify that we are dealing with the current trustee of the trust and we look to the agreement for that information. If the trust agreement does not provide for a successor, or if the named successor cannot so act, it may be necessary to seek court appointment of a successor.
CLOSING SCENARIOS WITH TRUSTS
TRUSTS AND POWER OF ATTORNEY DOCUMENTS
Historically a trustee was not permitted to delegate their fiduciary duty of operation of the trust to someone by way of a Power of Attorney. A legislative change in the last few years altered that limitation and now use of a Power of Attorney may be possible under a trust. The Trust Agreement must not exclude that power from the Trustee's fiduciary responsibilities though so review of the Trust Agreement by the title company's underwriter is a must before a Power of Attorney can be considered.
Many underwriters require that the proceeds from sale be distributed only to the named persons or entities that are in title. That means if title is held as "John Doe, Trustee of The John Doe Trust" a title company should be depositing funds into a bank account that is styled "The John Doe Trust." Many times sellers come to closing and instead want to deposit funds into an account owned by the individual. This may be permitted under very limited circumstances but the title company needs to know if this is the intent of the parties well before closing. If a seller comes to closing and then wants to disburse proceeds to an account that is not in the name of the trust there can be delays in funding the file. If your seller does not have a bank account set up in the trust name please notify your closing team well before closing.
BUYERS IN TRUST
When your buyer wants to take title in the name of a trust, the Trust Agreement must be reviewed if they are getting a loan to purchase. It is also important that title is taken in the name of the trustee for the trust and not just the trust name alone.
BUYERS THAT TAKE TITLE INDIVIDUALLY BUT LATER DEED TO THEIR TRUST
This second conveyance can negatively affect title policy coverage for the purchaser. If you have a client that wants to later deed into a trust they should contact us before they file a deed. There is an additional endorsement to their Owner's Title Policy that can be purchased to extend the coverage to the trust instead of just them individually.
CLOSINGS WITH TRUSTS: WHAT SHOULD A REALTOR DO?
As a realtor, it can be a big help to notify your clients when they list the property that the title company is going to request a copy of the trust agreement and it is necessary for the file.
It is also very helpful to notify the title company if your clients intend to purchase in the name of the trust so that we have advance warning and can work with them to properly structure the file.
Our closing teams at Texas National Title are all well versed in the complexities associated with closing into or out of a trust. We are the experts that you need and the partners that you can trust in all things escrow and title! Please do not hesitate to contact us with any questions that you have.