Issue 4

Summer 1999

A PUBLICATION OR THE TITLE COMPANY OF NORTH CAROLINA

TRUSTS – CONVEYANCE ASPECTS FROM A TITLE INSURER’S PERSPECTIVE 

1.   General Comments 

A conveyance to and from a trustee for a trust can appear either in the back chain of title or be the subject of the “current title transaction” to be insured.  The same is true about conveyances to the trust in the trust name and by the trust.  There are several issues that the title examiner and closing attorney should be aware of. 

2.     Does it make a difference if the transfer is in the back chain of title as opposed to being in the subject of the transfer being insured? 

The answer is, legally, “no” (unless adverse possession applies) but practically, “yes,” in some cases.  For example, if a conveyance by a trustee for a trust occurs in the back chain of title, a title insurer and, therefore, title examiner should not be concerned about authority of the trustee to execute the conveyance unless the title records disclose a reason to question the trustee’s authority.  It is reasonable to assume that such prior transactions would have been challenged already if inappropriate. 

However, if the conveyance is the transaction to be insured, obviously, existence of the trust and authority of the trustee are critical since there is no transfer more obviously open to scrutiny than this one.  That would make examination of the trust document important.  Often, this document is not recorded.

3. How is title to be conveyed in favor of a trust? 

(a)     General Rule

Unless one of the exceptions below applies, the conveyance should be to a grantee as follows: “A (an individual or corporation, partnership, LLC or other established legal entity), trustee for (B, beneficiary) or (the XYZ trust).  “This is appropriate because A is either a person or a recognized legal entity. 

The conveyance should not be to, for example, “The ABC Family Trust.”  This is because of a persuasive argument that, in most cases (see exceptions below), a trust is not a legal entity.  Therefore, the argument continues, the conveyance might be void for want of an existent grantee.  In a deed, there must be a grantee capable of holding title.  See 117 N.C. 394, 23 S.E. 428. 

In Florida, our colleagues have pondered the problem of a conveyance to a trust not falling within an exception.  Concern over validity of the conveyance is real.  However, they propose a theory of validity, which goes something like this.  (1) If the trust agreement says that title taken in the name of the trust is held by the trustee(s), the transfer is valid because the trustees hold title.  (2) What if the trust agreement does not do this?  The argument is that, a court will try hard not to invalidate a conveyance and if it is obvious which trust was to receive the benefit of the conveyance, the conveyance will be deemed valid under various, and in some cases, implied theories, with the trustee actually being the title holder.  

Obviously, portions of this theory, especially (2), are a “stretch.”

(b) Exceptions to the rules

G.S. 39-44 through G.S. 39-47 pertain to “business trusts.”  The term means any unincorporated association (which includes a “Massachusetts business trust”) engaged in any business or trade under a written instrument or declaration of trust under which the beneficial interest is divided into shares represented by certificates or shares of beneficial interest.  G.S.39-44.  A business trust may hold title in the trust name.  G.S.39-45.  Title need not be conveyed to a trustee for a trust.  If title is conveyed (1) to a business trust in its trust name or (2) in the names of its trustees for the trust, title shall vest in the business trust.  G.S.39-46.  Conveyance can be by the trust in the trust name by an instrument signed by at least one of its trustees, its president, a vice-president or other duly authorized officer, and attested or countersigned by its secretary, assistant secretary or such other officer as is the custodian of its common seal, not acting in a dual capacity, with its official seal affixed.  Proof and probate are in the manner of conveyances by corporations.  If the conveyance occurs after June 28, 1977, there must be recorded in the county where the land lies a memorandum or written instrument, or declaration of trust referred to in G.S. 39-44, setting forth the name, date and place of filing, if any, of the written instrument or declaration of trust, and all amendments. 

G.S. 39-47 validates transfers in conformity with the statutes, which took place prior to the statutes’ enactment. 

Otherwise, even when a business trust is not involved, if a trust is a legal entity (such as a corporation), a conveyance to and by the entity is valid, as long as in accord with the trust’s powers.

4. What are the powers of a trustee? 

The provisions of a trust control.  When conveyance by or to a trustee for a trust is the transaction to be insured, the document creating the trust should be reviewed.  A trust can expressly grant the trustee the power to sell and convey real property.  A power to sell does not include the power to mortgage.  A power to invest and reinvest the trust corpus includes the power to sell and convey. 

228 N.C. 562; 251 N.C. 14; 263 N.C. 189. 

G.S. 32-25 through G.S. 32-28 pertain to trust powers.  The statutes pertain to testamentary and interviews trusts.  G.S.32-25.  An instrument can incorporate by reference any or all of the powers in G.S. 32-27.  G.S.32-26(a).  Such incorporation does not limit other common law or statutory powers.  G.S. 32-26(b) says that no such power shall be exercised in a manner as, in the aggregate, to deprive the trust of certain specified tax deductions, credits, etc.  However, it is believed that a violation of this rule does not render an otherwise valid act invalid; however, the fiduciary could have liability in such a case.

G.S.32-27 sets out a comprehensive list of powers that can be incorporated by reference.  G.S.32-27(2) is the power to sell, exchange, give options upon, partition, or otherwise dispose of any property which the trustee may hold, with or without a court order, at public or private sale or otherwise, upon such terms and conditions as the trustee deems advisable and to convey the property free of the trust and the party dealing with the trustee shall have no duty to follow the proceeds.

G.S.32-27(3) sets out the power to invest and reinvest as to real property.  (Other trust powers pertaining to real property, beyond a detailed discussion, are G.S.32-27(8); G.S.32-27(8.1); G.S.32-27(11); G.S.32-27(12); G.S.32-27(19); G.S.32-27(20); and G.S.32-27(30).

In most cases, the trust contains express trust provisions.  However, G.S.36A-135 through G.S.36A-140 are statutes entitled, “Powers of Trustees.”  The statutes apply to express intervivos or testamentary trusts.  G.S.36A-135(a).  The statutes apply to all trusts in existence on December 1, 1993 or created on or after December 1, 1993.  The trustee has all of the powers and duties under the statutes to the extent those are not inconsistent with the powers and duties imposed in the express trust.  G.S.36A-135(a), (b) and (c). 

G.S. 36(a)(11) states that the statutes do not apply to “any other trust the nature of which does not allow for general trust administration.”  The passive trust rule says that if a trust has no trust powers, title conveyed to the trustee is vested in the beneficiary under the “statute of uses.”  G.S.41-7; 233 N.C. 549, 64 S.E. 2d 830.  It is debatable about whether G.S.36(A)-135(a)(11) precludes the statutes from giving a trustee powers and therefore preventing a trust being subject to the statute of uses – such precluding would seem to defeat the purpose of the statutes.

G.S.36A-136 contains a list of powers applicable to trust.  G.S.36A-136(8) refers to the power to sell, exchange, partition, dispose of, or grant options with respect to real property in the manner set out in G.S.36A-139 and G.S. 36A-140.  However, G.S.36A-136(8) makes it clear that the powers in an express trust control and, in that event, G.S. 36A-1329 and G.S.36A-140 do not apply to the extent of any inconsistency.

When G.S. 36A-139 is otherwise applicable, there is a legitimate question regarding its meaning.  The statute and caption read as follows:       

Sec. 36A-139.  Disposition of real property without court order.       

Pursuant to the authority contained in G.S.36A-136(8), the trustee has the power to sell, exchange partition or otherwise dispose of, or grant options with respect to, real property of the trust upon such terms as he may deem just and for the advantage of the trust.  The procedure shall be as provided in Article 29A of Chapter 1 of the General Statutes, entitled “Judicial Sales.”  If the clerk of superior court is petitioned and provided with satisfactory proof that the best interest of the estate will be served by private sale, the clerk may authorize a private sale in accordance with the provisions of G.S.1-339.33 through G.S.1-339.40.

Obviously, the caption of the statute and the first sentence are clear.  Standing alone, the first sentence grants a power not requiring a court order.  The second sentence creates an ambiguity when compared to the caption and first sentence.  G.S.1-339.1(a) states that a “judicial sale” is one made pursuant to an order of a judge or clerk in a superior or district court action. While that statute exempts certain sales from the definition of a “judicial sale,” a sale under G.S.36A-139 is not specifically exempted.  G.S.1-339.1(a)(9)’s exemption is for “[a]ny other sale the procedure for which is specifically provided by any statute other than this Article.”  (Emphasis added.)  However, G.S. 36A-139 does not specifically provide for a procedure other than the procedure in the judicial sales statutes applicable.  The last sentence of G.S.36A-139 does not eliminate ambiguity.  It simply states that a private sale may be authorized in accordance with G.S.1-339.33 through G.S.1-339.40.

G.S.1-339.3, G.S.1-333.3A, and G.S.1-339.4(8) refer to a sale that is ordered.  For a public sale, there is an order of sale containing the sale’s terms.  G.S.1-339.13.  The statutes provide for the contents of notice of public sale, which notice among other things, refer to the order authorizing the sale and state the sale’s terms.  G.S.1-339.15. 

Private sale, referred to in G.S.36A-139, is outlined in G.S.1-339.33 through G.S.1-339.40 and also requires an order of sale, among other sale requirements.  G.S. 1339.33.  The order shall prescribe the sale terms that the judge or clerk deems advisable.  G.S.1-339.33.

However, the precise meaning of G.S.36A-139 is unclear.  There are at least two possible interpretations.  First, insofar as a public sale is concerned, due to the second sentence of G.S.36A-139, all of the judicial sales statutes apply.  If that interpretation is correct, an order would be required but the judicial officer would not have discretion to sign it; the judicial officer would have to sign the order.  A private sale is discretionary with the clerk and would have to be ordered.

Another interpretation of G.S.36A-139 is that the second sentence of G.S.36A-139 makes only Part 2 of Article 29A of Chapter 1 applicable to a public sale. No order would be required to authorize the sale.  However, the conduct of the sale would have to comply with sale requirements in Part 2, including, arguably, G.S.1-339.27(a)’s requirements for an order of resale in the event of an upset bid.  Also, G.S.1-339.30(d) regarding order of sale should be noted. Under this interpretation, G.S.36A-139’s last sentence would require an order of private sale when a private sale is to be conducted.  G.S.1-339.33.  Certain attorneys feel that the second interpretation is correct, and that seems to make the statute make sense.

G.S.36A-136(8) refers to G.S.36A-140, which reference is subject to G.S.36A-136(8)’s rule that the terms of an express trust control.  G.S.36A-140 is entitled, “Disposition of real property by court order.”  It provides that:  “(a) A trustee may request the clerk of superior court to issue to him an order to sell, exchange, partition, or otherwise dispose of, or grant real property of the trust.  (b) Sales of real property shall be conducted as provided in Article 29A of Chapter 1 of the General Statutes, entitle ‘Judicial Sales’.”

G.S.36A-140(a) states that the trustee may request an order; this is somewhat different than G.S.36A-139’s terminology and G.S.36A-140(b) is phrased different than G.S.36A-139’s second sentence.

There are other powers in the long list in G.S.36A-136, including G.S.36A-136(17), the power to invest and reinvest trust property as the trustee deems advisable in accord with the trust provisions or as provided by law.  G.S.36A-136(17) could imply a power to sell.  However, G.S.36A-136(8) probably was intended to control.  If G.S.36A-136(17) is subject to G.S.36A-136(8), that seems to mean that the power in G.S.36A-136(17) will apply to situations other than situations governed by G.S.36A-136(8).

G.S.36-136(14), the power to employ agents and attorneys-in-fact to assist the trustee, allows a trustee to use an attorney-in-fact to execute a deed if the trustee has decided to sell under G.S.36A-136(8).  A trustee probably cannot delegate his decision-making responsibility to the attorney-in-fact.  G.S.36A-136(14) could be used even if a power to sell other than G.S.36A-136(8) is used.  For example, see the powers in G.S.32-27 discussed above.  G.S. 36A-136(14) cannot be used if the trust says otherwise.

G.S.36A-135(a) makes G.S.36A-73 applicable.  (G.S.36A-73 applies even when Article 13 of Chapter 36A is inapplicable.)  G.S.36A-73 states how many trustees must act.  If there are more than two, whatever the trust document says governs.  G.S.36A-73(a).  If there are two trustees, both must act.  G.S.36A-73(d).  If there are more than two and the trust instrument is silent, a majority must act.  G.S.36A-73(d).

5.     What about trusts in wills?

A valid, duly probated will can establish a testamentary trust.  In such a case, the will’s provisions should be read to see (1) what the trust property is; (2) who the trustees are and how many must act and whether the trustees are also the executors; (3) what the trustees’ powers are with respect to trust real property; and (4) how the trust provisions relate to or conflict with the will’s powers granted to the executor(s). 

Also, pursuant to G.S.31-47, the testator in a will may devise real property to the trustee of another trust if the other trust is established in writing prior to the execution of the will.  The other trust can be an intervivos trust or another testamentary trust.  The terms of the intervivos or other testamentary trust existing at the testator’s death control. 

The usual estate concerns, which will be discussed in a subsequent article, should be examined – such as “death taxes.”

THE TITLE COMPANY’S TITLE INSURERS 

The Title Company of North Carolina, Inc. is a wholly owned subsidiary of Old Republic National Title Insurance Company.  For the sixth consecutive year, Old Republic is the only title insurer to receive a claims-paying ability rating of A+ from Standard & Poor’s – the highest rating given by S&P to any title insurer to date.  Old Republic has also received the title industry’s only A1 financial strength rating from Moody’s Investor Services and is the only national title insurer with a AA rating from Duff & Phelps.  In addition, Old Republic is the only title insurer in its peer group (total assets of more than $100 million) to receive an A+ rating from LACE Financial Corporation for five consecutive years (LACE’s highest rating).  A.M. Best Co. A (Excellent) rating assigned to Old Republic reflects its consolidated operating performance and strategic relationship with Old Republic International Corporation and Old Republic Title’s excellent capitalization, liquidity, investment strategy, excellent reserving and strong market share.  Overall, Old Republic’s unequaled ratings indicate secure claims-paying ability and high financial stability unsurpassed by other insurers.

We are also proud of our agency relationships with Lawyers Title and First American Title.  These two title insurers and Old Republic also allow the Title Company of North Carolina to insure the largest of transactions at the most competitive of prices.

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