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Source of Title Blog

Can A Trust Hold Title In Ohio?
by Robert Franco | 2012/02/23 |

Generally speaking, a trust is not a legal entity and it may not hold title to real property, with a couple of exceptions for specific types of trusts.  Rather, it is the trustee who holds title for the benefit of the beneficiaries of the trust.  For example, the proper grantee on a deed funding a trust with real property is "Jon Smith, Trustee of The Jon Smith Trust."  A deed to "The Jon Smith Trust" is a void ab initio because the trust is a non-entity.  Unfortunately, there are many deeds of record purporting to convey the property to the trust, with no mention of the trustee.  Ohio has recently passed a bill that will allow for such defects to be cured.  

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In the past, many practitioners would consider such deeds a nullity.  If the grantor was still alive, the deed could be corrected and re-filed.  But, after the grantor has passed it is more difficult.  One common practice was to include the property in the estate of the grantor, and it would then pass according to the terms of his will.  If he had a pour-over will, leaving the property to the trust, the same end result would be obtained.  However, if the trust was not the beneficiary under the will, the results could be very different and not what the grantor had intended.

Some practitioners would attempt to cure the defective deed by filing a memorandum of trust, identifying the trustee, and an affidavit of facts to correct an error in the name on the deed.  However, because the deed is considered void ab initio, as if it never was, it is not entirely clear that this is a proper cure. 

The Ohio legislature has recently passed S.B. 117, which was signed by the governor on December 21, 2011 and will become effective on March 22, 2012.  It makes a significant change to O.R.C. § 5301.071, which provides:

No instrument conveying real property, or any interest in real property, and of record in the office of the county recorder of the county within this state in which that real property is situated shall be considered defective nor shall the validity of that conveyance be affected because of any of the following:

* * *

(E)(1) The grantor or grantee of the instrument is a trust rather than the trustee or trustees of the trust if the trust named as grantor or grantee has been duly created under the laws of the state of its existence at the time of the conveyance and a memorandum of trust that complies with section 5301.255 of the Revised Code and contains a description of the real property conveyed by that instrument is recorded in the office of the county recorder in which the instrument of conveyance is recorded. Upon compliance with division (E)(1) of this section, a conveyance to a trust shall be considered to be a conveyance to the trustee or trustees of the trust in furtherance of the manifest intention of the parties.

(2) Except as otherwise provided in division (E)(2) of this section, division (E)(1) of this section shall be given retroactive effect to the fullest extent permitted under section 28 of Article II, Ohio Constitution. Division (E) of this section shall not be given retroactive or curative effect if to do so would invalidate or supersede any instrument that conveys real property, or any interest in the real property, recorded in the office of the county recorder in which that real property is situated prior to the date of recording of a curative memorandum of trust or the effective date of this section, whichever event occurs later.

This essentially confirms that an incorrect deed to a trust is a valid conveyance to the trustee, so long as two conditions are met.  First, the trust must have been duly created at the time of the conveyance.  And, second, a proper memorandum of trust, with a legal description of the property, is recorded in the county where the deed was recorded. 

This curative section is retroactive, however, it will not have retroactive effect if another conveyance has been recorded prior to the recording of the memorandum of trust.  This is important for the following reason:

Assume that Jon Smith conveys title to his real property to "The Jon Smith Trust" and the beneficiaries of the trust are his children from his first marriage.  Jon Smith dies and his will leaves everything to his second wife.  His intent was clearly to leave his real property to his children in trust, and everything else to his wife. 

However, when the defective deed is discovered, the real property is included in his probate estate and passed to his wife with a properly recorded Certificate of Transfer. 

The trustee now wants to rely on the newly enacted Ohio statute to file a memorandum of trust and validate the conveyance to the trustee, thereby intending to supersede the certificate of transfer.

O.R.C. § 5301.071(E)(2) would not permit the trustee to file a memorandum of trust and essentially claim that the defective deed was valid to reclaim the real property for the trust beneficiaries, because there has already been a conveyance which would be invalidated.

This new law will make it easier to cure a common title problem so that the results conform to what the grantor most likely intended - the trustee to hold title to the property.  This is certainly great news for those who have mistakenly prepared the deed to the trust.

One question comes to mind, however.  Is it now possible to create an intentionally defective deed to a trust as an estate planning tool?  In the past, nobody intentionally created a defective deed.  This new statute was intended to cure a defect that has quite obviously always been created by mistake.  But, by expressly providing a way to retroactively cure this defect, is there now an option to "wait and see" to provide more flexibility in estate planning? Consider this hypothetical:

Jon Smith intentionally deeds his property to "The Jon Smith Trust."  After Jon Smith passes, his heirs, who may very well be the same trust beneficiaries, realize that it has been a long time since the trust has been reviewed and updated.  They do not like the trust terms and would rather take title through probate and own it outright, than be burdened by the trust terms. Could they decide NOT to file the memorandum of trust and instead include the property in the estate of Jon Smith?

The new statute will only give retroactive effect to the defective deed if a memorandum of trust is filed before another conveyance that would be invalidated or superseded.  So, logically, if a certificate of transfer is obtained and recorded before a memorandum of trust is filed, the defective deed cannot be cured and the certificate of transfer would be a valid conveyance.  The result is that the heirs would hold title outright.

Of course, if the heirs decide the trust is more beneficial or convenient, they could simply file the memorandum of trust to retroactively cure the defect and the trustee would hold title to the real estate.  

It is less clear whether this strategy, which is arguably "too cute by half," would work to obtain tax advantages or whether it could be useful in Medicaid planning.  My guess is that a taxing entity or the administrator of the Medicaid Recovery Program would not consider the conveyance effective until the memorandum of trust is filed.  Of course, a savvy  practitioner would argue that the statute provides for retroactive effect and that the conveyance should be respected for all purposes as of the time the defective deed was recorded.

What about creditor's rights?  Suppose Jon Smith has a son with money problems.  The trust provides a spend-thrift provision to protect the trust assets from the son's creditors.  If Jon Smith's real property passes to the son through probate, it would be available to satisfy his debts.  In the hypothetical above, the heirs could wait and see if Jon Smith's son still has creditors knocking on his door to decide whether to cure the defective deed, or pass the property through probate.  Should this be an option?  Would retroactive effect be given to the defective deed even though it would prejudice the rights of the creditors? 

Either way, we will likely see litigation when the issue arises, whether the defective deed was a "mistake" or part of an "intentional" planning strategy.  The result may be that the conveyance is not retroactive for all purposes.  For example, a conveyance made for Medicaid planning purposes to "The Jon Smith Irrevocable Trust" may not start the clock running on the five year look-back period because the grantor could still sell the property by deeding it to a third party before he files the memorandum of trust to cure the defective deed.   Arguably, if the grantor still has control over the property the clock should not begin to run on the look-back period.  But, if the defect in the deed was an "honest mistake" it would seem that the legislature's intent that the cure is retroactive should be respected.

Because of the uncertainty, it is still good practice to get it right - deed to the trustee, NOT the trust.  In light of the difficulty in proving an "honest mistake" and the real potential for abuse, the retroactive effect may not be respected for all purposes.  Only time, and expensive litigation, will tell.  




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Categories: Abstractors, Ohio Legislation, Title Problems

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Source of Title Blog

Robert A. FrancoThe focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

 

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