When it comes to transferring property, such as our rental properties into LLCs and our personal residence into a Trust, it can be confusing understanding the differences between a Quit Claim Deed, Warranty Deed and other terms that may be thrown out.
Some states use the term “Grant Deed”, California being one of the most preeminent. The reality is that a Grant Deed can be used as a Quitclaim Deed OR a Warranty Deed. It essentially depends on the verbiage used inside the terms of the Deed itself. Bottom line- Make sure that you look at the language used in the deed itself. Don’t think that because you have a Grant Deed you have all of the benefits of a Warranty Deed. Here is a brief description of each type of Deed:
A quitclaim deed transfers whatever ownership interest a person has in a property. It makes no guarantees about the extent of the person’s interest. Quitclaim deeds are also frequently used when there is a “cloud” on title — that is, when a search reveals that a previous owner or some other individual, like the heir of a previous owner, may have some claim to the property. The transferor can sign a quitclaim deed to transfer any remaining interest.
A warranty deed transfers ownership and explicitly promises the buyer that the transferor has good title to the property, meaning it is free of liens or claims of ownership. Also, whatever the ‘title’ of the deed is you may use, check the verbiage in the deed itself to understand what warranties you may be making, if any. The transferor guarantees that he or she will compensate the buyer if that turns out to be wrong. The warranty deed may make other promises as well, to address particular problems with the transaction.
Always double check the ‘local’ state and county laws regarding the type of deed to use when transferring property and what the different types of deeds actually provide. HOWEVER, we generally recommend the Warranty Deed when transferring property to yourself, your trust, or your own company; because we want to make sure that the Title Policy and all of its benefits transfer to the Grantee of your deed.
Many real estate investors and landlords often ask whether they should use an umbrella insurance policy or a LLC to protect them from liabilities that may arise on their rental property. An LLC protects the owner of the LLC from liabilities that arise on any property in the LLC and prevents a plaintiff from being able to go after the LLC owner personally. As a result, we often say that an LLC protects a business owner’s personal assets from the risks and liabilities of the LLC business. An umbrella policy is coverage above and beyond the typical property insurance and covers additional risks and adds additional coverage to a typical property insurance policy.
Issues and Factors
There are many issues and factors to consider in making this decision and there is no one-sized fits all recommendation. In many instances we recommend that you have both an LLC and an umbrella policy and in other instances we may recommend just an LLC or just an umbrella policy. The first factor to consider is the cost. The cost of an LLC in our office is $800 and on average you can expect about $200 in fees a year to keep that LLC active with the State (about $900 annually in California, each state is different). As a result, the major cost of an LLC is in the first year but you can plan on having about $200 in fees each year (each state is different) to keep your LLC active. If you have a partnership LLC then you also have the cost of a LLC partnership tax return but the LLC also provides a significant amount of partnership advantages and protections.
An umbrella policy on the other hand is typically paid for monthly. Let’s say you are able to get $1M in umbrella protection at a cost of $50 a month. That would run you about $600 a year. Insurance policies have benefits which include attorneys whom the insurance company will appoint and pay to defend you (and protect themselves from having to pay) but also contain certain exclusions to coverage that may leave you with no coverage for the liability you incur. Another important factor to consider is the type of property you own. If you own a multi-unit property or commercial property we would recommend having both an LLC and an umbrella policy because you have more liability exposure when you have more tenants. On the other hand, if you have a single family rental in an otherwise good neighborhood where you feel less likely to be sued then we may only recommend an LLC or an umbrella policy on its own. Bottom line, consider both an LLC and an umbrella policy in your analysis and get quotes and advice upon which to make an informed decision so that you are protecting your assets in the most efficient and effective way as possible.