Understanding Trustee’s Deeds

Trustee’s deeds convey real estate out of a trust. Depending on the circumstances, they may or may not include warranty to the title. They are also used in some foreclosure situations (generally without warranty). In addition to meeting the state and local content requirements for traditional deeds (grant deeds, quit claim deeds, etc.), they should include a reference to the related trust and trust agreement.

This type of conveyance is named for the person using the form – the trustee – who stands in for the beneficiary of the trust and holds title to the property. Trustees act according to the terms of the trust, and under the direction of the trustor, also called the settlor, grantor, or donor (the person or entity who transferred the assets into the trust). In some situations, the trustor may also serve as the trustee [1]. Note that when signing trustee’s deeds, the trustee must identify him/herself as trustee and include the full name of the trust.

For example, Joe owns a 5000 acre ranch that includes three houses, barns, and open land. He decides to divide it between his grandchildren when he dies. Because they are currently only 10, 12, and 16 years old at the time, Joe partitions the property into three separate tracts and transfers all of those into a living trust, naming himself as trustee. This way, he retains control over his entire property, and, by way of trustee’s deeds, distributes the parcels to each grandchild as he sees fit.

Using the same basic facts, what if Joe becomes ill? He can still set up a similar trust but instead of naming himself as trustee, he appoints someone else to manage the transfers and execute trustee’s deeds based on criteria specified in the trust agreement. Because it was Joe’s land to start with, and assuming he had clear title to it when he formed the trust, the trustee’s deeds to his grandchildren might include a warranty.

Trustee’s deeds transfer real property out of land trusts. A land trust is “an arrangement by which the recorded title to the real estate is held by a trustee, but all the rights and conveniences of ownership are exercised by the beneficial owner (beneficiary) whose interest is not disclosed.” The beneficial interest, however, is that of personal property rather than real property. This means the beneficiary “may transfer it by assigning that interest without the formality of executing and acknowledging a deed; the wife or husband need not join in such assignment for the purpose of releasing the spouse’s homestead rights.” [3]

The beneficiary or other named entity retains power of direction over the trust, and instructs the trustee to act on his/her behalf. This is especially useful when a large number of people share ownership of the real estate held in a land trust, or if the owners live far enough apart that getting a deed signed and notarized is not feasible.

Further, because “the interest of the beneficiary under a land trust is personal property and because the trust agreement expressly precludes the vesting of title (legal or equitable) in a beneficiary, partition is not available. Thus, the use of the land trust prevents the possibility of clouds on title in these situations” [4]. So, when the beneficiaries notify the trustee, in writing, of their wish to sell the property, as with living trusts, the trustee executes and signs a trustee’s deed to convey property out of the land trust. Because the title is more likely to be clear, trustee’s deeds from land trusts might include a warranty, making it easier to obtain title insurance.

Revisiting the example of Joe and his grandchildren, a land trust is only a good option for him if his grandchildren live far away from his ranch and do not intent to live or work on it, but he wants them to have a financial interest in the property.

Trustee’s deeds are also used in some foreclosure situations. In some states, deeds of trust (also known as trust deeds), along with promissory notes, function as alternate forms of mortgages. Like a mortgage, a deed of trust establishes real property as collateral for a loan. A trustee holds legal title to the real property under the trust deed until the borrower repays the lender.

Trustees in these situations are often “entities like banks, title companies, or escrow companies” [2]. If the borrower defaults on the loan, the trustee manages the sale upon foreclosure, and executes a trustee’s deed upon sale to convey the property. Be aware, though, that trustee’s deeds in foreclosure situations typically do not include warranty of title, so it might be more difficult to obtain title insurance.

View Available Real Estate Deed Forms

Trust law is complex and its rules vary from state to state. Depending on the circumstances, a trustee’s deed may or may not be the appropriate document for conveying title to real property. Consult a lawyer for help in determining how the law applies to specific situations.

[1] http://www.calbar.ca.gov/Public/Pamphlets/LivingTrust.aspx

[2] http://homeguides.sfgate.com/purpose-trustee-deed-36895.html

[3] http://www.idfpr.com/banks/consumer/tips/TRUSTS.ASP

[4] http://files.ali-cle.org/thumbs/datastorage/lacidoirep/articles/PREL_PREL0701-zschau_2_thumb.pdf