Trustee’s Role in a Real Estate Transaction
When a trustee of a trust is engaged in a real estate transaction, he or she is acting as the representative of the beneficial owner of the real estate, not in his or her own individual capacity. A trustee holding real estate can: (1) enter into a purchase agreement; (2) grant a deed; (3) modify a deed; (4) record documents; and (5) consummate purchases and sales of real estate on behalf of a trust. A deed, mortgage or deed of trust signed only by the trustee as "Trustee of the ____________ Trust" (the trust name) is binding on the trust even if the trustee: (1) fails to sign individually; (2) signs incorrectly as trustee; and (3) does not attach a certificate of trust , assuming the certificate of trust is provided to the other party or recorded concurrently with the incorrectly signed document. It is often most efficient to have the trustee sign real estate documents in a representative capacity as trustee of the trust.
If only the trustee signs an agreement, deed or instrument regarding the real estate, a prospective lender may be concerned with the status of the lender’s ability to enforce obligations. If the deed, purchase agreement or instrument is then signed by an incorrect second individual in his or her individual capacity, the lender may be confused whether it is bound by the incorrect signature. Care should be taken to spell out the roles of the signers in order to avoid confusion.
Types of Trusts for Real Property
It should be no surprise that real estate can be owned by all types of trusts, and it is. These trusts include revocable and irrevocable trusts, non-grantor (also called third-party) and grantor (also called first-party) trusts. Each trust type has its own rules and legal requirements that affect whether and how a trustee signs real estate documents. If the trust is a revocable trust, whether grantor or third-party, then the trustee generally executes the deed and other documents as "Trustee of the trust dated ____" (insert date). Examples of this type of trust include grantor revocable trusts, supplemental needs trusts, and many asset protection trusts. Revocable trusts typically contain a provision giving the person who creates the trust, the "grantor," the right to amend, revoke or terminate the trust, and a right to reacquire the trust property by substituting property of equivalent value. Since the grantor has control of the trust, so long as the grantor has not made an assignment or transfer or encumbered the trust property to a third-party (i.e., a third-party lender), the grantor can modify the trust or reacquire trust property. Therefore, unless and until the trust property is encumbered by some sort of assignment, transfer or encumbrance, if the assets of the trust are transferred back to the grantor, the trust property will be subject to the control of the grantor. Once the trust property is transferred or encumbered, the trust should be amended to reflect the assignment to the trustee (e.g., the mortgage) or the addition of other real estate (e.g., the title to real property). If the trust is an irrevocable trust, either a non-donor trust (i.e., a third-party trust) or a revocable trust where the grantor has not retained any powers over the trust, then the trustee has two options for how a deed should be executed. The more common option is that the trustee will sign the deed "Pursuant to", "as Trustee of" or "in his or her capacity as the Trustee of" the trust. The less common option is that the irrevocable trust lands owner must execute the deed in his or her name "as trustee" or "trustee of the trust" assuming the trustee has the authority to do so under the trust agreement.
Statutory Requirements in Trustee’s Signatures
California has specific requirements that must be met when a trustee is signing a real estate document as a trustee. In short, it depends on whether the trust has a trustee who can act on behalf of the trust.
For example, if the trust has two trustees, both trustees must sign every document – even if the language of the trust states that a majority of the trustees can do whatever they want. The problem is that without both trustees’ signatures on a quitclaim deed, the deed can be voided and title insurance will not pay a claim against the deed.
On the other hand, if the trust only has one trustee, then that trustee’s signature is sufficient to convey the real property. The trust can have a mechanism in which a majority of the trustees can approve the transaction, but only the actual trustee’s signature will be enough to confirm the sale.
Two examples:
1. Revocable trusts typically have language that allows the current trustees to convey or transfer title without the need to get signatures from future or successor trustees. Even if the signatures of the future or successor trustees would be necessary to convey title out of the trust, it is important to understand the proper procedure to make the deal work.
2. Frequently, single person revocable trusts identify the successor trustee or trustees in the first page of the trust. The real property may be transferred from the individual to the trust when the single person trust is created. Problems often arise when the individual is replaced by the successor trustee(s), or there is a disagreement about whether the successor trustee(s) have properly stepped into the shoes of the original trustee.
Procedures that a Trustee should follow when signing
A. Sign in the name of the Trust and on behalf of the Trustor
When the Trustee signs the declaration page of a document such as a grant deed, most documents require that it be signed as follows: "John Doe, Trustee of the John Doe Trust under the Declaration of Trust dated June 1, 2000." When signing as Trustee, a Trustee should always sign in the same manner so it is always clear when a signature is validly placed on behalf of the trust.
B. Have evidence of your Identity
All signatories to all documents are required to provide evidence of their identity. Identification with an address on the face of the identification is preferred. If you have used this same identification previously that may not be necessary.
C. Have evidence of your Authority to sign for the Trust
Evidence of your authority to sign on behalf of the Trust may be contained in the following documents:
- The Trust Agreement – if the Trust Agreement is attached to the deed which the Trustee is signing, the parties to the transaction will have evidence of the Trust’s existence and the identity of the Trustee.
- A Certification of Trust. California’s Probate Code section 18100 et seq. provides a form for Certification of Trust which contains sufficient information to confirm the existence of the Trust and the identity of the Trustee.
- A Power of Attorney. If the Trustee has a Power of Attorney which grants them the power to do any of the acts granted within the Power of Attorney. If the Power of Attorney does not contain the power to accept a Trust, the Power of Attorney must contain a Ferro/Trilogy Certification provided within Probate Code section 18200 et seq.
- A Declaration of Trust. Instead of a Power of Attorney, some Trusts have a Declaration of Trust which grants one individual the power to sign for the Trust. If the Declaration of Trust contains the power to accept a Trust, the Ferro/Trilogy Certification is unnecessary but the Declaration of Trust must be attached to the documentation.
Common Errors Trustees make when signing
One common mistake is not signing in the proper capacity despite the signature block indicating such capacity. Another mistake is not signing the document properly, such as not including the full title of the trust or omitting the name of the co-trustee. It is not unusual for Title Companies to refuse to close title transfers because the deed was not signed the proper way by the settlor. Notaries also can make mistakes. For example , a common mistake is not notarizing the trust deed properly. This may result in the Title Company not recognizing the trust deed and having to record an Affidavit of Heirship or a corrective deed. If you are a trustee, it is best to be familiar with the various requirements for signing real estate transactions before the time of signing. Checklists created by the authors for our clients are useful in that regard.
Case Examples: How Trustee’s signature went wrong
To illustrate the importance of ensuring valid signatures, let’s review some common accidents and the resulting complications:
1. Wrong person signing
A vacant parcel of land was transferred by a trustee who lacked authority to sign on behalf of his co-trustee. The authorized co-trustee signed a declaration after the fact, stating that she "would have" executed the original deed had she been available at the time. While an improper computation of a signature can sometimes be repaired post hoc by filing a ratification or other documentation with the county recorder, such a belated affirmation does not remedy a defect in the underlying signatory. An invalid signature on a deed at the time of execution creates a legal nullity, regardless of later "corrections."
2. Failure to obtain consent
A property owner formed her LLC for the purpose of holding title to her recently inherited properties. Later, when seeking a loan from ABC Bank, the LLC member and trustee signed a deed of trust on behalf of the LLC — without expressly stating that they were acting in their capacities as managing member and trustee. The deed of trust stipulated that it was "made for the benefit of and at the request of [ABC Bank]." Thus ABC Bank, the third-party beneficiary of the instrument, could not assert and "step into the shoes" of the LLC, which as a consequence had no claim against the property.
3. Invalid signatures of co-agents
A couple purchased an apartment complex, paying cash and closing the transaction on behalf of their joint venture. Although both spouses executed the purchase and sale agreement, only the husband’s name appeared in the deed. Several years later, the husband died in an airplane crash. After the wife assumed sole management of the partnership, she entered into a 10-year leasing arrangement, in which she personally signed as lessor. Two years later, the partnership was dissolved, and when the surviving spouse sought to terminate the lease, the lessor, an entity owned solely by her husband, disclaimed her authority to do so.
Cases involving the signature of a trustee or agent are particularly important because the attorney, real estate broker or other fiduciary involved in the acquisition could be held personally liable for damages arising from improper execution of documents.
Role of Counsel in Trustee’s Signature
It is generally essential to obtain advice from legal counsel prior to the signing of legal documents by a trustee. It is important that the trustee understands the legal implications of the transaction and whether he or she has the power to fulfill his or her obligations in connection therewith, especially in the event that such obligations impose liability, either individual or joint, upon the trustees personally.
For instance, where the trustee is required to sign a personal guarantee in respect of an obligation of the trust, it is necessary for the trustee to take advice in order to understand the nature and extent of the obligations assumed by his or her signature . The trustee should also provide information to legal counsel regarding the obligations owed by the trustees under the underlying trust documentation and whether the obligation involved is one which could be properly carried out under the terms of the trust. Legal counsel should be cautious in accepting the authority of the trustees and may wish to request a copy of the trust deed, accompanied by a written declaration by an appropriately authorised trustee that the proposed transaction is within the powers of the trust.
Trustees might, in addition, consult with their legal counsel as to whether the other trustees should also sign the documentation. This advice should take into account both the terms of the trust documentation as well as the particular circumstances surrounding the transaction. The practicalities as to the division of labour between legal counsel and the trustee are freely adjustable.