A Few Pointers on the Preparation of Estate Planning Deeds

by Elizabeth J. Zook

In the last few weeks I have been called upon to draft a number of estate planning deeds at the behest of my firm’s rather excellent Estate Planning Department (similar to my opinion of my own children, I’m only slightly biased on this point), and it occurred to me that there should be a place to go for a thoughtful discussion of the considerations in putting together estate planning deeds.  I’m not sure this is that thoughtful place, many of the writings out there are decidedly excellent, but in any event here are a few of my thoughts on the topic.

1.         Use a Special Warranty Deed.  This is not the place to discuss in detail the myriad of forms of the lowly deed that are currently in use in North Carolina but suffice it to say that, in broad strokes, a general warranty deed contains a warranty that the title to the property has never been adversely affected, while a special warranty deed has a more limited warranty that the land owner has never done anything to adversely affect title during ownership of the land.  In estate planning deeds, we like to narrow the scope of the warranty contained in the deed to help protect our clients from future title claims for matters predating the client’s ownership of the property, hence the use of a special warranty deed with its more limited warranties.  This is particularly true when the property is being conveyed by a trust—while the beneficiaries of the trust, and thus commonly the recipient of distributions of trust property, are entitled to warranties of title, they are not entitled to warranties of title beyond the trust’s ownership of the property. Some practitioners take this one step further by using either a non-warranty deed—just like the title suggests, this form of deed expressly disclaims any warranty of title to the property—or a quitclaim deed.  I like to think of a quitclaim deed as something along the lines of: “I don’t know what interest I may have in the land, but whatever it may be, it’s your problem now so don’t come bothering me about it.”  I find that it is easier to obtain title insurance using a special warranty deed than a quitclaim deed, so I tend to prefer special warranty deeds for that reason.  That said, I’m sure there are plenty of title policies insuring transfers by quitclaim deed.  One caveat to the foregoing, when an estate planning transfer is a gift without consideration, it may be proper to use a gift deed, which is another name for a non-warranty deed, the logic being that the recipient of a gift is not entitled to any warranties at all.  That said, I still may council we use a special warranty deed given its limited scope and easy acceptance for purposes of obtaining title insurance.

2.         Call the Title Insurance Company.  Sometimes estate planning transfers can have the inadvertent consequence of voiding title insurance coverage on the land.  If there is title insurance coverage, talk to the title company about endorsing the policy to name the new land owner as the insured or to arrange a new title policy, if needed.  The title insurance companies are generally very helpful, so don’t be afraid to give them a call.

3.         Call that Other Insurance Company.   Sometimes estate planning transfers can have the inadvertent consequence of voiding property insurance coverage.  As with the title company, I’m sure the insurance agent will be glad to talk to you about how to preserve coverage on the property.  After a fire or other casualty is not the time to discover that thanks to an estate planning transfer the property does not have casualty insurance.

4.         Update Title.   For goodness sake, unless you know a lot, a whole lot, about the ownership of the property being transferred under an estate planning deed and a whole lot about the dealings of the person or entity who owns the property (and trust me, it’s tough to know anyone that well), request that your real estate attorney prepare a title search of the property and obtain title insurance in the name of the new property owner.   In brief, a title search is a search of the public records relating to a piece of property and its owners, both current owners and previous owners depending on how far back in time the title to the property is searched.  All this means is, a title search is a tool we use to help determine (i) who owns an interest in the property (e.g. Who is the current owner?  Is there a tenant of record?  Does anyone have easement rights to use the property?), and (ii) are there any liens on the property like deeds of trust, liens for unpaid taxes, or judgments.  Though we routinely offer to prepare title work for the property as part of the estate planning transfer, clients sometimes resist on the grounds of cost, both for the title search and for the title insurance premium.  Often  when property is being transferred for estate planning purposes, title is moving among family members, like from the parents to another family member, like a child, and because of the close relationship of trust between the parents and the child they decide that there is no need for title work.  Mom and dad paid off the mortgage years ago and they pay the taxes on time without fail.  What’s the risk?   Well, the risk can be quite large for the child in this scenario.  Let’s assume that John and Jane are married and decided to give their daughter Susan a piece of vacant land worth $20,000 that Jane recently received as a gift from her Uncle.  Susan builds herself a home on the property to the tune of $100,000 for the construction costs and lives there for a few years, but then times get tough and Susan loses her job, so she needs to sell the house as quickly as possible.  Susan is in luck!  A new buyer comes along and puts the property under contract for $130,000 but when the buyer’s lawyer prepares the title work it turns out that Jane’s uncle was involved in a lawsuit that resulted in a $140,000 judgment against him and that judgment attached to the property prior to the transfer to Jane.  Now, Susan is obligated by the contract to sell the property but she will have to come out of pocket $10,000 at closing just to satisfy the judgment, not to mention other closing expenses she may have like ad valorem (real property) taxes, excise taxes and a real estate commission.  By the way, third party buyers almost always get title work for the property they are buying, their lawyer and their bank know that people do stupid stuff to the title of property, and will insist on title work.  If Susan and her parents had requested title work, their lawyer would have found the judgment and advised them on how best to proceed or, goodness forbid, the judgment was somehow overlooked in the title search (this is rare, I promise), the title insurance company would have stepped in to deal with the judgment, in either event, Susan would have saved herself a substantial loss.  So, for goodness sake, ask your real estate counsel to search title and get a title insurance policy.

5.         Be Sure to Reference the Right Statutes.  In certain instances we work with clients with larger estates where one spouse has significantly more assets than the other spouse.  It’s beyond the scope of this discussion, but suffice it to say that by transferring some of the assets of what estate planners refer to as the “greater propertied spouse” to the “lesser propertied spouse” (not only are these terms amusing they are relative, often one spouse is worth a few million and the other several more million).  By equalizing the assets held by each spouse, we can save a great deal of money when it comes time to pay estate taxes.  When I am called upon to draft deeds conveying land from one spouse to the other spouse to equalize their individual assets, I want to make sure to include some version of the following language:

“This Deed is given pursuant to Section 39-13.3(c) of the General Statutes of North Carolina in order for Grantor to convey Grantor’s interest in the Property as a tenant by the entirety to Grantee for the purpose of dissolving the tenancy by the entirety and vesting the Property in Grantee.  This conveyance shall not be deemed to create separate property as defined in Section 50-20(b)(2) of the North Carolina General Statutes; instead, the Property shall retain its status as marital property as defined in Section 50-20(b)(1) of the North Carolina General Statutes.”

Can you guess why this language might be so important?  The answer is quite simple, sometimes even the best marriages end in divorce.  Imagine Jane owns more assets than her husband John so they decide with their estate planner that Jane will convey her family farm (owned by Jane’s family for generations) to John to equalize their estates.  Sometime later their once happy marriage ends in divorce and John’s divorce lawyer cunningly points to the estate planning deed for the farm, arguing that the farm is now John’s separate property and is not subject to equitable distribution in the divorce.  Won’t Jane be hot under the collar to lose her family farm based on a transfer that was supposed to be for estate planning purposes only?!  To avoid this inequitable result, we want the deed from Jane to John to make it clear that while the property is owned by only one spouse, it is still marital property for purposes of equitable distribution under NCGS Section 50-20.  That way in a divorce proceeding, the property cannot be excluded from equitable distribution by the grantee spouse, which makes sense given that the conveyance was really for the estate planning purpose of allocating assets among the spouses to equalize their estates.  In case you are really interested (and deeply geeky), I’ve included a cut and paste of the relevant statute below, along with portions of a couple of related statutes for your consideration and enjoyment.

6.         Determine if the Conveyance has Already Occurred.  First off, what in the world is probate?  Probate is nothing more than the judicial procedure establishing the validity of a will or other testamentary document.[1]  Interestingly enough, by itself a will that is duly and timely[2] probated is sufficient to convey title to land—no need for a deed!  So let’s assume Jane, newly divorced from John and once again the sole owner of her family farm, leaves the farm to her daughter Susan under the express terms of Jane’s will.  When Jane dies and her will is duly and timely probated in the county where the farm is located, the farm automatically becomes Susan’s property effective as of the date of Jane’s death without the need to record a deed or other evidence of conveyance.  Now, while this is pretty neat, there are a few things to keep in mind.  First, the will has to be probated in the county where the land is located.  Second, the title to the land is deemed to have passed retroactive to the date of death.  So, a probated will forms an integral part of the chain of title to a piece of property included in the will. A word of caution, the rules are different for owners of North Carolina land who live (and die) outside of North Carolina.  Also, there are instances where a deed conveying land is warranted, even necessary, despite a probated will.  In these instances the beneficiaries of the will should be included as grantees—the probated will made them owners of the property.  Your estate practitioner can help with the nuances.[3]  When conveying property held by an intestate estate (i.e. the decedent died without a will), all non-grantee heirs should join in the conveyance as grantors.  When someone dies intestate all of their real property automatically becomes the property of the heirs as determined by North Carolina’s intestacy statute, so they are in fact owners of the property not just heirs.

7.         When Conveying Trust Property, Make Sure You Name All of the Grantors.  One of the most complicated considerations when drafting a deed conveying trust property is who should be the grantor.  The grantor is the person(s) or entity(s) that hold an interest in the trust property being conveyed which interest(s) need to be released as part of the conveyance.  The most obvious grantor is the trustee of the trust.  However, if the trustor has passed away, the executor of the trustor’s estate may also be a proper grantor in addition to the trustee.[4]  For example, where the trustor is deceased, there may be two related  camps with claims on the assets of the trustor, the trust that owns the property being conveyed and the estate of the trustor.  The estate’s interest in trust property flows from the estate’s rather onerous duty of seeing to the decedent’s final bookkeeping–paying the decedent trustor’s creditors and disbursing any remaining trust assets to those lucky enough to be named in the trustor’s will (or designated as heirs of the trustor by statute in the event there is no will).  Though subject to the claims of creditors of the estate, a transfer of trust property by the trustee of the trust to the beneficiaries of the trust is valid without the joinder of the executor of the decedent’s estate.  However, the trustee of the trust is liable to the creditors of the trustor’s estate to the extent that after the transfer of the trust property to the trust beneficiaries there are insufficient assets in the trustor’s estate to pay those creditors.  To relieve the trustee of such liability, the executor of the estate can join as an additional grantor in the conveyance of trust property.  However, this creates its own problem–the liability to creditors passes from the trustee to the executor, which generally is not any better a result.  Accordingly, we advise our clients to wait and convey trust property to the beneficiaries of the trust after the notice to creditors has run.  Once all of the creditor’s claims have been received (or cut off) it can be determined whether there are sufficient assets in the estate to cover its liabilities without laying claim to the trust property.  At that point, there is little risk to the trustee and executor signing a conveyance of trust property—at least little risk of liability to creditors.  To go one step further, if the transfer of trust property is to less than all of the beneficiaries of a trust, then non-grantee beneficiaries may need to join in the deed as additional grantors (now there are three plus grantors!), upon probate of the will the title may have automatically transferred to the beneficiaries particularly where the allocation of the property among beneficiaries is unclear from the terms of the will, in which case the other beneficiaries in fact own an interest in the property and should included as grantors.  Keep in mind, this is just one scenario involving a transfer of trust property to beneficiaries of the trust after the death of the trustor, the proper grantors may be different in any given scenario.  Just as an example, where trust property is being sold to a third party bona fide purchaser for value during the life of the trustor, you will have a whole different set of grantors.  Your real estate professional working with your estate planner will be glad to help sort through the proper grantors for your trust conveyance.

 

STATUTES – A CUT & PASTE

 

§ 39‑13.3. Conveyances between husband and wife.

(a) A conveyance from a husband or wife to the other spouse of real property or any interest therein owned by the grantor alone vests such property or interest in the grantee.

(b) A conveyance of real property, or any interest therein, by a husband or a wife to such husband and wife vests the same in the husband and wife as tenants by the entirety unless a contrary intention is expressed in the conveyance.

(c) A conveyance from a husband or a wife to the other spouse of real property, or any interest therein, held by such husband and wife as tenants by the entirety dissolves such tenancy in the property or interest conveyed and vests such property or interest formerly held by the entirety in the grantee.

(d) The joinder of the spouse of the grantor in any conveyance made by a husband or a wife pursuant to the foregoing provisions of this section is not necessary.

(e) Any conveyance authorized by this section is subject to the provisions of G.S. 52‑10 or 52‑10.1, except that acknowledgment by the spouse of the grantor is not necessary.

 

§ 52‑10. Contracts between husband and wife generally; releases.

(a) Contracts between husband and wife not inconsistent with public policy are valid, and any persons of full age about to be married and married persons may, with or without a valuable consideration, release and quitclaim such rights which they might respectively acquire or may have acquired by marriage in the property of each other; and such releases may be pleaded in bar of any action or proceeding for the recovery of the rights and estate so released. No contract or release between husband and wife made during their coverture shall be valid to affect or change any part of the real estate of either spouse, or the accruing income thereof for a longer time than three years next ensuing the making of such contract or release, unless it is in writing and is acknowledged by both parties before a certifying officer.

(b) Such certifying officer shall be a notary public, or a justice, judge, magistrate, clerk, assistant clerk or deputy clerk of the General Court of Justice, or the equivalent or corresponding officers of the state, territory or foreign country where the acknowledgment is made. Such officer must not be a party to the contract.

(c) This section shall not apply to any judgment of the superior court or other State court of competent jurisdiction, which, by reason of its being consented to by a husband and wife, or their attorneys, may be construed to constitute a contract or release between such husband and wife.

 

§ 50‑20. Distribution by court of marital and divisible property.

(a) Upon application of a party, the court shall determine what is the marital property and divisible property and shall provide for an equitable distribution of the marital property and divisible property between the parties in accordance with the provisions of this section.

(b) For purposes of this section:

(1) “Marital property” means all real and personal property acquired by either spouse or both spouses during the course of the marriage and before the date of the separation of the parties, and presently owned, except property determined to be separate property or divisible property in accordance with subdivision (2) or (4) of this subsection. Marital property includes all vested and nonvested pension, retirement, and other deferred compensation rights, and vested and nonvested military pensions eligible under the federal Uniformed Services Former Spouses’ Protection Act. It is presumed that all property acquired after the date of marriage and before the date of separation is marital property except property which is separate property under subdivision (2) of this subsection. This presumption may be rebutted by the greater weight of the evidence.

(2) “Separate property” means all real and personal property acquired by a spouse before marriage or acquired by a spouse by devise, descent, or gift during the course of the marriage. However, property acquired by gift from the other spouse during the course of the marriage shall be considered separate property only if such an intention is stated in the conveyance. Property acquired in exchange for separate property shall remain separate property regardless of whether the title is in the name of the husband or wife or both and shall not be considered to be marital property unless a contrary intention is expressly stated in the conveyance. The increase in value of separate property and the income derived from separate property shall be considered separate property. All professional licenses and business licenses which would terminate on transfer shall be considered separate property.

 

§ 31‑39. Probate necessary to pass title; rights of lien creditors and purchasers; recordation in county where real property lies.

(a) A duly probated will is effective to pass title to real and personal property.

(b) A will is not effective to pass title to real or personal property as against lien creditors or purchasers for valuable consideration from the intestate heirs at law of a decedent, unless the will is probated or offered for probate before the earlier of (i) the date of the approval by the clerk of the superior court having jurisdiction of the decedent’s estate of the final account filed by the personal representative of the decedent’s estate, or (ii) the date that is two years from the date of death of the decedent. If the will is fraudulently suppressed, stolen, or destroyed, or is lost, and an action or proceeding is instituted within the time limitation set forth in this subsection to obtain that will or establish that will as provided by law, the time limitation under this subsection begins to run from the termination of that action or proceeding.

(c) A will duly probated in one county of this State is not effective to pass title to an interest in real property located in any other county of this State as against lien creditors or purchasers for valuable consideration from the intestate heirs at law of a decedent unless a certified copy of the will is filed in the office of the clerk of superior court in the county where the real property lies within the time limitation set forth in subsection (b) of this section.

(d) A conveyance made by the intestate heirs at law of a decedent before the expiration of the time limitation set forth in subsection (b) of this section shall, upon the expiration of that time, become effective to the same extent as if the conveyance were made after the expiration of that time, unless before the expiration of that time, a proceeding is instituted in the proper court to probate a will of the decedent.



[1] This is a rough paraphrase of the definition of probate found in Blacks Law Dictionary, 7th Edition

[2] See NCGS Section 31-39 for the time constraints on probating a will, a cut and paste of the statute is below.

[3] Thanks are due to David Bennington with Investors Title for his helpful article “Prove It! (If Your Title Passes by Will),” published in the September 2012 issue of The NC Connection, Investors Title’s rather informative news letter.

[4] Assuming, of course, that the trustee has the authority pursuant to the trust documents to convey trust property.




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