Finding The Correct Title Insurance Policy

I have sent clients of mine who have bought real estate individually and who have later transferred the real estate into a revocable trust a letter asking them to call their title insurance company to request a CLTA 107.9 endorsement to add their trust as an additional insured. In my letter, I am referring to the title insurance policy that was issued to the owner when the real estate was originally purchased. The real estate may have been refinanced one or more times after the purchase and on each refinance the lender was issued a lender’s title insurance policy. But the client/owner is not insured under the lender’s title insurance policy. Therefore, the client needs to find the title insurance policy issued to him or her or them when the property was originally purchased and the client needs to call that particular title insurance company to request an endorsement.

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Making Sure Your Title Insurance Policy Will Be In Force When You Need It

When real estate is purchased, the buyer typically also buys a title insurance policy. When the buyer later sells, if there is a problem with title to the property, the title insurance company is obligated to take care of it. It has come to my attention that some title insurance companies may deny coverage where after the property was purchased it was transferred to a revocable living trust. This problem can be taken care of by obtaining a CLTA 107.9 endorsement adding the trust as an additional insured. The small cost of obtaining this endorsement is worth it and will give the owner of real estate that has been transferred to a trust peace of mind. PLEASE TAKE THIS REMINDER SERIOUSLY AND MOVE FORWARD TO OBTAIN THESE ENDORSEMENTS FROM ALL RELEVANT TITLE INSURANCE COMPANIES AS SOON AS POSSIBLE. TELL YOUR FRIENDS ABOUT THIS TOO!

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Portability- The Best Kept Secre

Recently the IRS released statistics for federal estate tax returns (form 706s) filed in 2011, which was the first year of portability (the ability of the surviving spouse to add the deceased spouse’s estate tax exemption to the surviving spouse’s estate tax exemption by filing a timely form 706). There were 1,565 non-taxable form 706s filed for California decedents dying in 2011. It is likely that most of these non-taxable returns were filed by the surviving spouse to elect portability. Given California’s large population, this is a very low number. It is likely that many surviving spouses failed to file a timely form 706 for their deceased spouses because they did not understand that portability was available. Further, there is no guarantee that the current $5,430,000 exemption equivalent will not be lowered (President Obama has a proposal which would lower it to $3,500,000). Lets get the word out!

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Some people have recorded a document entitled homestead indicating that they want a certain dollar amount of the value of their principal residence to be protected from their creditors. Some companies even solicit people to have the company prepare and record the homestead on the homeowner’s behalf. But California law grants owners of a home a homestead, whether or not a document has been recorded. Stated differently, a certain dollar amount of a person’s personal residence is protected from creditors whether or not a written homestead document has been recorded on the home. This benefit that California law gives to homeowners is sometimes called a statutory homestead.

Recorded homesteads and statutory homesteads do not interfere with the sale of the residence.Recorded homesteads and statutory homesteads do not interfere with the placing of a mortgage (note secured by deed of trust) on the residence. Recorded homesteads and statutory homesteads do not interfere with a later transfer of the residence to a revocable living trust.

Assuming that a creditor obtains a judgment against a homeowner and that the homeowner’s equity in his or her home exceeds the dollar amount that is protected by the homestead, the creditor can force the home to be sold and the creditor can get that excess amount in satisfaction of the judgment.

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When the original of the trust document has been lost

A person who has a revocable living trust may inadvertently lose the original trust document. He or she will typically continue to hold title to assets in the name of the trust. The person can still furnish copies from his or her copy of the trust if and when a bank, broker, insurance company or title company asks for a copy.

If that person asks whether there will ever be any negative consequences to not having the original, there is no clear answer. It is possible that a title company or a bank or a broker will some day ask to inspect the original, but it is also possible that this will not occur. If the person who has lost the original of his or her trust wants to guarantee that there will be no future problems, he or she could ask his or her attorney to prepare a new trust and to assist the person in re-titling the assets from the name of the old trust to the name of the new trust.

If the person asks whether this new project is absolutely necessary, the answer is no. But the answer is no because it is not clear whether or not a future problem will occur because the original trust document has been lost. The real question is whether or not the person feels it is worth it to pay to create a new trust in this situation. Each person needs to decide that for himself or for herself.

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New IRS ruling where surviving spouse forgot to timely file the deceased spouse’s federal estate tax return and thereby failed to make portability election

When one spouse dies on or after January 1, 2011, his or her federal estate tax exemption can be transferred to the surviving spouse if the surviving spouse files a timely form 706 federal estate tax return for the first-spouse-to-die. Under certain conditions, based on Rev Rul 2014-18 which the IRS issued on January 27, 2014, a late-filed 706 will be considered as if it were timely filed, ie it will be treated as effective for purposes of making the portability election. Those conditions are:

1. The first-spouse-to-die was a U.S. citizen or resident
2. The first-spouse-to-die died in 2011, 2012 or 2013
3. A form 706 was not previously filed for the first-spouse-to-die
4. A form 706 was not required to be filed for the first-spouse-to-die because the estate of the first-spouse-to-die was not large enough to require it being filed.
5. The form 706 for the first-spouse-to-die must be filed no later than December 31, 2014
6. The form 706 for the first-spouse-to-die must state at the top of page one: Filed Pursuant to Revenue Procedure 2014-18 to elect portability under Section 2010(c)(5)(A)
7. The filer of form 706 is the executor of the estate of the first-spouse to die.

If you are a surviving spouse, or if you know of a surviving spouse who finds himself or herself in this position, it is critical that this opportunity be taken advantage of. Stated differently, if the above conditions all exist, the surviving spouse needs to file the first-spouse-to-die’s estate tax return form 706 no later than December 31, 2014 with the required statement on the top of page one in order to transfer the first-spouse-to-die’s estate tax exemption to the surviving spouse.

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Is there a need to save estate tax?

For persons dying in 2014, the estate tax exemption is $5,340,000. If the surviving spouse files a timely estate tax return for the first-spouse-to-die, the first-spouse-to-die’s exemption can be added to the surviving spouse’s exemption. This is called portability. Unless the current exemptions are reduced, and there is no longer a sunset date at which they will expire, the assets of most people will not be subject to the federal estate tax at their deaths. President Obama has put forward a proposal which would reduce the exemption to $3,500,000, but at this time there are not enough favorable votes in Congress to pass this proposed legislation. It is important for people to monitor future changes in the law that Congress might choose to enact.

In 2014 the annual free gift is $14,000 per donor per donee. Many people make gifts to family members either out of love or to help meet a need of the donee. But if the only reason for making the gift is to save estate taxes, donors need to consider whether or not their assets are likely to be subject to estate taxes based on the current rules discussed above.  Further, there are advanced techniques to reduce estate taxes such as family limited partnerships, grantor retained annuity trusts, sales to defective grantor trusts, and qualified personal residence trusts. In determining whether or not these advanced techniques are worth considering, donors again need to consider whether or not their assets are likely to be subject to estate taxes.  

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