With increasing frequency, real property owners are choosing to hold title in trusts. Once you put title into a trust, you don’t want to have problems conveying title out of the trust. You also don’t want creditors of the trustee to be able to lien the property of the trust. Such concerns should be much less worrisome after Senate Bill 40 becomes effective on August 8, 2001.
Problems with trusts and titles in Colorado result from statutory recording requirements which were little known and seldom followed prior to the Lackner case, which made its way up to the Colorado Supreme Court last year. In Lackner, the recording requirements were not observed and a personal creditor of an individual who happened to be a trustee was able to levy against real property owned by the trust. The decision was subsequently reversed by the Supreme Court, but the case put the fear in practitioners and motivated the legislature to pass Senate Bill 40.
Colorado law provides two methods for a trust to take title to real estate: the traditional method of taking title in the name of the trustee(s), and a special statutory method of taking title in the name of the trust. Traditionally trusts take title in the name of the trustee because conceptually a trust is a relationship, not an entity capable of taking title. This traditional concept is modified in certain circumstances by statute or rule. For example, certain trusts are independent entities for purposes of paying income taxes or being subject to the supervisory jurisdiction of the courts.
In Colorado the traditional method of taking title in the trustee(s) led to the problems that developed in the Lackner case. While common practice was simply to quitclaim to “John Doe, Trustee of the Doe Family Trust,” there were further recording requirements lurking in the statute which were designed to provide proper notice of John Doe’s trustee relationship. Failure to satisfy these recording requirements resulted in John Doe taking title as an individual, not trustee. This meant that John Doe could create a renegade, legitimate chain of title superior to that of the beneficiaries of the trust.
Attorneys who were knowledgeable about this problem preferred the alternative approach authorized by statute, taking title in the name of the trust. But there was a trap there, too. The statute authorizing a trust to take title had its own recording requirements, and the statute was written in such a manner that the trust technically could not take title until the recording requirement was met. This created problems because people still actually held the title they presumed they had passed to the trust with a simple quitclaim deed to “the Doe Family Trust.”
Senate Bill 40 eases the recording requirements for taking title in the name of the trustee by providing that failure to satisfy the requirements results only in a presumption that John Doe holds title as an individual. Second, it allows the trustee to satisfy the recording requirements at any time after the original deed is recorded by simply recording an affidavit with the required information. The new law eases the requirements for taking title in the name of the trust by providing that the trust’s title is no longer conditional upon meeting the recording requirement. Instead, the recording requirement (now a Statement of Authority instead of the previous Affidavit) can be met afterwards, for example when it is necessary pursuant to a sale or mortgage of the property.
Senate Bill 40 allows us to go forward and correct the current state of real estate titles held by trusts and trustees, without worrying that such efforts may be useless. In most cases, satisfying the recording requirements now or at such time as a transaction needs to take place will be a simple matter of recording the necessary document or providing it to the title company, without the trauma that can occur if, for example, a death has occurred in the interim.
Conveying title to a trustee or a trust still must be done with caution, however. Even with the new law, there remains a small risk that a trustee may create a renegade chain of title before the recording requirements are met. Title insurance coverage may be destroyed in the conveyance if proper attention is not paid to this detail. Failure to correctly state the trustee’s authority to deal in the property can result in increased transaction costs and litigation risks. Our firm can assist you with these issues by reviewing the current state of real estate titles held by a trust and making any corrections necessary, or by assisting you with new real estate transactions involving a trust to ensure title is obtained or conveyed correctly.
For more information on this topic, please click on the following link to the article “Marketability Issues of Titles Held by Trusts and Trustees.”
If you have questions about a trust or another estate planning or administration issue, please contact Michael Smeenk.