On July 11, 2016, I began a short blog series on how to successfully prepare and record a deed in New York State. In that post, we reviewed the various types of deeds available such as warranty deeds, bargain and sale deeds and executors deeds. We also discussed the importance of securing a copy of the last deed of record and ensuring that when preparing a new deed, you do not deviate from name spellings and owner capacities, such as tenants by the entirety, joint tenants and tenants in common. The newly prepared deed should reflect the name of the owner/seller as it exactly appears, and in the capacity that the owner/seller received title to the property.
Given that my practice areas are land use development and transactional real estate, today’s post will discuss deed transfers where no consideration is paid by the buyer. You may have occasion to provide no consideration deed transfer preparation when, for example, clients are transferring a real estate asset from their individual capacity to a corporate or LLC capacity. In other words, the seller is not receiving any money for the transfer because in most instances, the seller is retaining some beneficial ownership in the property. For instance, if John Smith is transferring a real estate asset to No # Main Street LLC, where John Smith is the sole member of the LLC; No # Main Street LLC may elect not to pay any money for the real estate asset because the transfer is done for liability purposes, and John Smith will continue to remain in possession and control of the asset. Similar types of no consideration transfers are also popular when a marital asset is being transferred as the result of a divorce or newly married couple.
The examples set forth above are usually undertaken in good faith and with the intent to manage a real estate asset in the manner desired by the owner/seller. However, attorneys should be careful to ask the right questions to determine the owner/seller’s actual intent in transferring a real estate asset, because no consideration transfers can raise additional title insurance exceptions in the future. Likewise, no consideration deed transfers can bring unwanted liability, such as existing judgments and liens, upon the new owner and potential state and federal tax consequences to both the seller and no consideration buyer.
So how does a real estate practitioner properly transfer an asset for no consideration, while at the same time, ensuring that the parties involved are protected from any negative consequences? The answer is simple; due diligence and disclosure. The reasons are abundant as to why It is not sufficient to secure a copy of the existing deed and then simply prepare a new deed. First, when a real estate asset is transferred for no consideration, the existing judgments, liens and mortgages transfer with the asset. Although the new buyer does not become personally liable for the debts, the new buyer cannot transfer the asset without paying off the debts. In the example above, assume that John Smith transferred his real estate asset to No # Main Street LLC, but John Smith failed to advise his attorney that he has a number of judgments and liens against him. Because the transfer is for no consideration, the judgments and liens against John Smith will continue to run with the land. Now, assume that John Smith is not the only member of No # Main Street LLC, but instead, John Smith has a partner, Mary Jones, who has no idea that John Smith has existing debts. Those debts will now potentially affect Mary Jones’ interest in the real estate asset owned by No # Main Street LLC.
In addition, no consideration deed transfers raise questions with respect to the intent of the seller. In the above example, perhaps John Smith intended to transfer the real estate asset in an attempt to avoid his existing creditors. Because No # Main Street LLC did not pay any consideration for the transfer, a title exception will be raised when No # Main Street LLC sells the asset requiring proof that John Smith did not transfer the asset to avoid the existing creditors. If No # Main Street LLC had paid value for the asset, it is less likely that a title insurance exception would be raised.
Other impacts of no consideration deed transfers include acceleration of existing mortgages. Most mortgages contain an acceleration provision if the asset is transferred to someone other than the mortgage borrower. Although in practice it is less likely that the lender will accelerate a mortgage that is not in default, nonetheless, the no consideration parties to the deed must be advised that this risk exists.
Likewise, when transferring real estate assets that arise from a divorce or a new marriage, the attorney preparer should take care to determine whether value is actually being paid or received for the transfer. If John and Mary get divorced, and as part of his settlement, Mary transfers her interest in the real estate asset to John, that asset should be valued; and, unless it is specifically defined otherwise, consideration should be paid on the value of Mary’s one-half interest in the asset. This is where accountants and tax attorneys should be consulted, to ensure that negative tax consequences do not arise from the no consideration transfer.
Finally, the way to avoid the pitfalls discussed above is to secure, at a minimum, a real estate asset last owner with judgment and lien search from your preferred title insurance provider. Review the report to determine whether a no consideration deed transfer will raise more questions than it might solve. Also, discuss the intentions of all parties to a no consideration deed transfer, as negative consequences can arise for all parties involved.