When Canadians purchase or sell real property, title insurance is usually a routine part of the real estate transaction. While most homeowners receive advice about the importance of title insurance at closing, they may not think to ask about the reach of that insurance when crafting an estate plan.
Whether land is being given as a testamentary gift or put into a trust, title insurance remains essential to safeguarding ownership rights. This form of insurance protects policy holders from losses arising from a variety of title-related risks, such as:
- unknown title defects that affect ownership;
- liens registered against previous owners (e.g., for unpaid property taxes or condominium fees);
- encumbrances and easements;
- encroachment issues (e.g., when a structure crosses onto a neighbouring property);
- errors in public records or surveys;
- title fraud; and
- other matters related to title that may impact the current owner’s ability to sell, mortgage, or lease the property.
While title insurance is a one-time premium, typically arranged during the closing of a purchase, the protection it provides extends long beyond closing. Coverage ought to remain in place as long as the policy holder has an interest in the property, and often extends to transfers resulting from estate planning.
Title Insurance and Testamentary Gifts
When real property is the subject of a testamentary gift in a will, the existing title insurance policy will usually continue to protect against defects in title once the land is in the hands of the policy holder’s heir, in keeping with the principle that the insurance policy “runs with the title.” Because a testamentary gift of land is transferred by operation of law, the heir is often able to simply step into the shoes of the original policy holder. The rationale for extending the coverage to the policy holder’s heir is that the risk which the insurer undertook to cover remains unchanged, as the heir acquires the very same interest in the property that was insured at the outset.
That said, individual policies should always be reviewed to determine whether a transfer must comply with conditions for coverage to extend to the policy holder’s heir. As long as any specified conditions are met, the heir ought to enjoy the same protection against pre-existing title defects without needing to pay a new premium, providing the heir with both the property and peace of mind.
Title Insurance and Bare Trust Arrangements
Alternatively, an estate plan may instead transfer real property into a bare trust, in which case the settlor of the trust remains the beneficial owner of the property but the trustee becomes the legal owner of it. Under these circumstances, the trustee will have no independent powers or responsibilities with respect to the property, other than acting on the instructions of the beneficial owner. Bare trusts are often used for succession planning to minimize probate fees, and to make the transfer of property to a beneficiary more efficient.
Title insurance should not be impacted by transferring a property into a bare trust so long as the beneficial ownership of the property remains unchanged. Bare trusts do not even constitute a disposition for tax purposes because there is no change in beneficial ownership, as recognized by the Federal Court of Appeal in Magren Holdings Ltd v Canada, 2024 FCA 202. Since there is no change in ownership, a title insurance policy should remain in effect if the land is transferred into a bare trust, as the protection provided by title insurance is not contingent on the form in which the property is held after closing. To this point, in Nadvornianski v Stewart Title Guaranty Company, 2006 CanLII 21787 (ON SC), the court accepted that the nature of an insured’s interest in property – legal versus beneficial – is often irrelevant to underwriting considerations related to title insurance.
Moreover, since the risk insured against does not increase or change if the property is placed in a bare trust, as the beneficial ownership of the property remains the same, the policy ought to continue to apply.
Estate Planning Should Contemplate Title Insurance
Real property often represents a significant portion of an estate, making title insurance a very salient consideration for estate planners. When estate planning includes the transfer of real property, it is essential to determine whether the property is protected by title insurance, and if so, to review the specific policy wording pertaining to transferring the property. Understanding how title insurance interacts with wills and trust structures is key to ensuring that a beneficiary who receives property, either as a gift or through a trust, receives it with the same protections as the original policy holder.
Thank you for reading, and have a great day! Ian.