Those are the not words I wanted to hear from the title company, but that was the message received just two weeks before the closing on this Franklin County farm. As it would turn out, there were a multitude of problems and to understand these problems we need to start in 1969.
In 1969, the father inherited the farm from his father. Then in 1993, he executed his Last Will and Testament (‘Will’). He also executed a Revocable Living Trust (‘Trust’) and transferred ownership of his farm from himself into his ‘Trust’.
In his ‘Will’, he named one daughter (Sue), and one son (Jim), to act as personal representatives of his estate. In the ‘Trust’, he named Sue and Jim as Trustees upon his resignation, incapacity, or death. In 1998, Jim resigned as Trustee, leaving Sue as the only Trustee.
In September, 2006, Sue signed a Deed conveying the farm from the ‘Trust’ and back to her father. Later, Sue would say that she didn’t know why her father wanted this done.
In December 2006, the father died. The four siblings believed that their father had transferred the farm to them through his Will. In 2008 the four siblings deeded the farm to a Limited Liability Corporation (LLC). The owners of the LLC were three of the four siblings, Sue, Charles, and Mary. Jim, the fourth sibling sold his interest to the other three. This Deed was recorded and the real estate tax statements were sent to and paid by the LLC.
In 2016, I listed the property and within a few months Mary, the managing member of the LLC signed a contract to sell the farm. Shortly thereafter, I received a call from the title company. The title search found that the property was owned by the father’s Trust and not by the LLC. Mary had signed a contract to sell property that the LLC didn’t own. I called Mary with the news.
At first, Mary said that her father never had a Trust, but then she recalled that Sue told her of a Trust their father had established several years ago. She asked that I call Sue. “Yes”, there was a Trust, Sue said and she was the Trustee. And “Yes”, the farm had been in the Trust but was removed. Her father had asked her to deed the farm back to him which she did in September, 2006.
Her account of this transaction was troubling and here’s why. If her father’s ‘Trust’ was typical of most trusts, then Sue could not have made a valid conveyance of the farm unless her father had died, been declared incompetent, or resigned. She acknowledged that none those had occurred at the time she signed the Deed.
I called the title company but immediately learned they were not questioning the validity of that Deed. Instead, they had determined that the property was in the ‘Trust’ because of Article 3 of the father’s ‘Will’. I asked them to send a copy of the ‘Will’.
Article 3 in the ‘Will’ stated that upon the father’s death all property owned by him not in his ‘Trust’ would go be conveyed to his ‘Trust’. Even if the September 2016 Deed had been valid and had transferred the title of the farm to him, Article 3 returned it to the ‘Trust’ after his death. I sent copies of the ‘Will’ to Sue, Mary and Charles. They were not aware of Article 3, but soon accepted the title company’s conclusion: The farm was owned by the Trust.
Sue immediately blamed the lawyer who prepared the deed in December, 2008 that had transferred the property from the four siblings to the LLC. She reasoned that the lawyer should have known that the ‘Trust’ owned the land and not the siblings. But after some probing questions, Sue acknowledged that the attorney did not prepare her father’s ‘Will’ or ‘Trust’; therefore, he could not have known that the Trust owned the farm. They furnished only the legal description of the farm and names of the buyers and sellers. No title search was done. They didn’t believe they needed search. The attorney prepared the Deed but added the following statement to the Deed releasing him from any legal problems that this Deed might create:
“This deed has been prepared without examination of an abstract of title, title insurance commitment, title insurance policy or public records of title; its content is based solely on legal description provided by, and representation as to title made by Grantors herein.”
Now that the siblings understood the Trust owned the farm, the next step was to find the Trust. Big Problem! It was lost and no one knew the lawyer who prepared it. But they got lucky! This title company didn’t need a copy of the Trust, but did require that the Trustee sign a Certification of the Trust. Sue was to certify that she was the only trustee, that the trust was in good standing and she had the authority to sell the farm. Many title companies would have wanted to read the Trust.
Sue signed, notarized, and delivered the Certification to the title company. Next, two deeds were prepared and signed. The first was a Deed signed by Sue, the Trustee of her father’s Trust conveying the farm to the LLC. That put the LLC as the owner/ seller as the sale contract stated. The second Deed conveyed the property to the buyers pursuant to the sale contract.
The sale closed and the buyer got an insured policy. The sellers got their money, but only after some very stressful days. So many factors could have prevented this sale from closing.
What Could have Gone Wrong?
- Suppose the father had stipulated in the ‘Trust’ that the land was to be deeded to a charity or to only one sibling, or to a non-family member and not to his siblings.
- Suppose he wanted the property divided among several parties who were not family members. And no one was aware of this until the title company did the search years later. This could have been mired in a court action for years!
- Suppose Sue decided that the property should be sold to someone other than the LLC. Suppose the title company wanted a copy of the ‘Trust’. And documentation that Jim had resigned as Trustee.
- Suppose Sue had died or became incapacitated and was unable to convey the property to the LLC. Since the ‘Trust ‘ was lost, no one knew if there were successors trustees.
The Deed from the ‘Trust’ to the father may not have been valid, but it did create a cloud on the title. If disputed, the courts would have to decide if it was valid. Even though the LLC original deed did not give the siblings ownership of the farm, it could have created a cloud on the title for future owners.
“We have a title Problem!” are the feared words I’ve heard many times during my 50 years of selling land. Some of the problems were solved easily, but some weren’t. There were a few times, I worked for weeks (once two years) with the sellers, the title insurance companies, and the lawyers to perfect the title. And nearly all of these title problems were created before the present owners took title to the property.
So, if you have inherited or purchased real estate without a title search and title examination, it would be advisable to do so. A title defect is easier and less stressful to correct now than two weeks before closing or after the kids have inherited the farm.