Asset protection planning affects many parts of the law, and some times planning tools have unforseen complications. Take, for instance, the common tool of transferring ownership of real property from individual name to an LLC or partnership.
Clients often convey legal title of Florida real estate to entities such as limited liability companies or limited partnerships for asset protection. The reason is that a creditor’s remedy against a debtor’s interest in an LLC or partnership is limited to a charging lien on profit distributions. The creditor’s judgment against the individual does not become a lien on assets within the LLC or partnership.
What most people fail to realize is that such transfers from individual name to entities owned by same individual may void title insurance obtained when the individual purchased the property in his own name. Title insurance is issued at time of purchase to the named buyer. Subsequent title holders are usually not covered by the initial policy. When an individual changes title of real property to an LLC or partnership, the titled insurance does not cover the entity; if there is a title problem the entity owner is not eligible to make a claim.
The solution is to purchase from the title insurer an endorsement which adds the transferee LLC or partnership as a named insured. Some policies do not permit an endorsement as described, and in this case, the LLC partnership will have to purchase a reissued policy to continue insurance coverage.
The title insurance issue is the same when the owner conveys title of real estate to another individual instead of to an LLC or partnership.