Hidden Risk In Asset Protection Of Real Estate

A real estate attorney alerted me to pitfalls in changing legal title to real property in the course of asset protection planning. To better protect real property from future creditors, many clients have told me that they have conveyed real estate that they purchased in their individual names to limited liability companies, corporations, or partnerships. Most often, people use quit claim deeds to make the conveyance. If a creditor records a certified copy of judgment against an individual that judgment becomes a lien on all real property titled in the debtor’s individual name.

The conveyance to another legal entity protects against the immediate lien on the real property, subject to any creditor argument of fraudulent conveyance. In general, such conveyance to entities from individual names is a good asset protection strategy. Yet, this attorney told me there are risks.

When the individual first purchases real estate in his own name he typically buys a title insurance policy insuring the individual against defects in legal ownership. The individual purchaser is the insured party. When individual owners convey real property to an LLC or corporation they rarely extend the title insurance to the new entity owner.

If they encounter a title problem when they sell the property the title insurance company can deny coverage to the entity owner because they are not named insured parties. The transfer for asset protection could forfeit valuable title insurance. A possible solution is a conveyance by warranty deed so that the individual guarantees good title to the entity, and in the event of a subsequent title problem, the individual grantor may have insurance coverage for his warranty of title. The potential issue illustrates the complexity of asset protection planning.