Article Scope and Purpose: This article defines what a “Trust Deed” is and provides readers with a basic background on their uses and applications.

Legal Disclaimer: The information contained here is for educational purposes only. This information is not a substitute for legal guidance. Each situation is unique. Contact our firm for legal counsel on deeds, trusts, and other real estate matters in the State of Utah.

Overview of Deeds, Trusts, and Trust Deeds

A deed is a document transferring ownership in real estate. A trust is an arrangement between parties to hold, manage, sell, or buy some property (for more information on Trusts, click here). A deed of trust is a document that transfers title in real estate to a third party, and it authorizes the third party to hold, manage, or sell the property depending on certain circumstances.

Trust Deeds are most often used to secure loans in real estate transactions (in title theory states). The deed of trust functions like a mortgage (in lien theory states). A deed of trust, like a mortgage, allows a lender to foreclose a loan and sell the real estate (attached to and insuring/securing the loan) if the debtor fails to repay the loan.

Additionally, deeds of trust are sometimes used in estate planning to avoid probate. Probate is an expensive and mandatory court proceeding to administer the property of an individual upon their death. However, if an individual doesn’t hold property at death, then there is no expensive probate proceeding. A deed of trust can be used to transfer the property prior to death. After the transfer but before their death, the property owner would still control the property through their trustee.

Deeds, Trusts, and Trust Deeds are complex legal creations. Below you will find more details on the definitions and processes surrounding them.

What is a Trust?

Definition of a Trust

A trust is a contractual agreement between three or more parties (businesses or people) to hold or manage some property in a particular way for the benefit of the beneficiary. To form a trust, one person (the settlor) transfers property to another (the trustee), and the trustee agrees to administer the property under the terms of the settlor for the benefit of a third party(ies) (the beneficiary(ies) of the trust). For more information on trusts, see our Trusts page.

What is a Deed?

A deed is a document transferring ownership in real estate. A deed states who gave (the “grantor”) and received (the “grantee”) the real estate on a particular date. A Grantor gifts or sells the real estate by signing a deed and handing it to the grantee. A Grantee accepts the deed by taking possession of it and paying any required price. A sale is the most common form of a real estate transfer, though, gifts (a transfer without an exchange of money) are allowed and enforceable.

After signing and receiving a deed, it should immediately be filed with the county recorder as part of the “chain of title.” (The “Chain of Title” is a record of ownership since the government originally owned the real estate). Once recorded, the deed serves as notice to the world that the grantee owns the real estate. Due to the value and uniqueness of real estate, Attorneys and Title companies often handle the drafting and recording of deeds.

Valid and Invalid Deeds

“Valid” means enforceable in court, conversely, “invalid” means unenforceable in court. A Deed is evidence for a claim of ownership in real property.

For a deed to be considered valid, it must (1) be in writing (to succeed against a statute of frauds argument); (2) adequately identify the parties; (3) adequately identify the real property transferred (e.g. address or legal description); (4) be signed by the grantor; (5) be delivered to the grantee; (6) state the consideration/price (only required if it is a sale, not if it’s a gift); and (7) recorded on the county records (to succeed against disputes of notice to third parties).

An invalid deed is considered a “cloud on title” and should be removed or cleared before a sale occurs. A “cloud on title” is any record that has been recorded on the chain of title at the county recorder’s office that disputes or clouds ownership, like a lien. If a party improperly places a lien or cloud on the title, they have likely violated the Utah Wrongful Lien Act and may be required to pay all attorney fees and liable for a fine of up to $10,000.00.

Deed Types

There are many types of deeds. All deeds transfer ownership from one party to another, but some deed types provide buyers with warranties and others do not. Each deed type has pros and cons for sellers and buyers.

List of Deeds Types: (1) Quitclaim Deed; (2) Deed of Trust; (3) Warranty Deed; (4) Mortgage Deed; (5) Bargain and Sale Deed; and (6) Grant Deed. The first 4 are the most common.

What is a Deed of Trust or Trust Deed?

A “trust deed” is a document that transfers the title of a piece of real estate to, and divides it between, a trustee and beneficiary (see above “What is a deed?” and “What is a Trust?”). Deeds of Trust are used most commonly to (1) insure/protect/secure a loan for the purchase of real estate against default and (2) in estate planning or asset protection situations.

How a Deed of Trust Insures a Loan

In real estate transactions, debtors often take out a loan to purchase a home from a Lender. When a lender wants to protect a loan from debtor default, the lender secures the loan with either a mortgage or deed of trust (depending on state law). Like a mortgage, a deed of trust allows a lender to foreclose on the home if a debtor doesn’t repay a loan. Unlike a mortgage, a lender holding a deed of trust can foreclose and sell the property without a court order — if the debtor violates the terms of the loan and the lender follows certain statutory procedures. If the property is sold due to default, the sale proceeds first go to pay off the loan, and then the excess, if any, goes back to the debtor.

Deed of Trust Process in Loans

Typically, upon purchasing a home, a debtor simultaneously takes a loan, pays for the property, and signs a deed of trust. Under the trust deed, the debtor becomes the Grantor/Settlor; the lender becomes the Beneficiary; and a Trustee is named (often an independent lawyer or trust company) and authorized to foreclose on the property if the debtor fails to repay the loan.

The deed of trust ensures the Debtor will pay the Lender back. The deed of trust is filed at the county recorder’s office and placed on the chain of title. If the Debtor makes completes the repayment of the loan, the Lender notifies the Trustee and requests that the Trustee transfer the Deed of Trust back to the Debtor (known as a “Reconveyance Deed”). Thereafter, the Debtor becomes the sole owner/titleholder of the property.

Deed of Trust in Estate Planning

Deeds of trust are also used in estate planning. The grantor may give the property to a trustee to hold until his or her death and thereafter sell it and distribute the proceeds to the grantor’s children. In some states, like Utah and Nevada, other more complex trusts can be created to hold the property for asset protection purposes.

A transfer of property to a trustee during the settlor’s lifetime results in a living (inter vivos) trust, and a transfer to a trustee pursuant to the terms of a settlor’s will creates a testamentary trust. The Utah Uniform Trust Code, codified at Utah Code 75-7, governs trusts in Utah.

For a trust to be valid and enforceable (1) the settlor must have the requisite capacity and indicate an intention to create the trust; (2) the trust must have a “definite beneficiary” (i.e., ascertainable now or in the future but doesn’t violate the rule against perpetuities); (4) state the duties to be performed by a trustee; and (3) the sole trustee and the sole beneficiary are not the same person in the trust (75-7-402). The trust must be created for lawful purposes that are possible to achieve and for the benefit its beneficiaries (75-7-404).

A living trust is an estate planning tool allowing the settlor to determine how his/her assets will be distributed without the oversight of the probate court upon his/her death. The trust is governed by a trust instrument (i.e. the written document (typically unrecorded) executed by the settlor that outlines the scope of the trust and the trust’s terms). The settlor may concurrently transfer assets into the trust and/or transfer property into the trust at a later date.

In order to convey real property into a trust, the settlor executes a deed and includes (1) titling property in the name of the trustee on behalf of the trust; (2) recitation of the name and address of the trustee, and the name and date of the trust (75-7-816). A trustee can also avoid filing a deed on the records by simply filing the trust instrument, signed by the grantor in the appropriate county recorder’s office. Recording the trust instrument is often avoided for privacy reasons.

The trustee holds the power to sell property held in trust (75-7-814(1)(b)), unless otherwise limited by the terms in the trust instrument. The trustee may sell the property because they hold legal title to real property as the trust’s administrator. To sell the real property, the trustee executes a deed to convey interest to real property out of the trust. A trustee’s deed to convey real property from a living trust is a form of special warranty deed, named after the executing party. Apart from conveying fee simple interest in the subject property to the grantee, a special warranty deed contains the grantor’s covenants that the property is free from encumbrances by the grantor, and the grantor promises to warrant and defend the property’s title against lawful claims arising from persons claiming by, through, or under the grantor (but none other).

The trustee’s deed must include (1) the name and date of trust instrument; (2) the trustee’s name and address; (3) a legal description of the subject property; (4) the signature of the granting party; (5) notarization before recording. All requirements for form and content of documents pertaining to real property should be met before the document is recorded.

Recipients of a trustee’s deed may require further proof of the trust’s existence and the trustee’s authority to transfer real property on behalf of the trust (See 75-7-1013 on certificates of trust).

CONCLUSION

If you need to draft and file a deed, then you are likely involved in a real estate transaction or estate plan. If you need a deed of trust filed, it is likely to protect a loan or ensure your real estate is transferred to a loved one. If done incorrectly, the deed may not transfer the correct property interest or be invalid altogether. If a deed or trust is incorrectly drafted or filed, the loan may not be secured or your loved one may not get the real estate upon your passing.

Therefore, it is essential to have an attorney draft and review your loan documents or estate plan. Our firm handles real estate transactions and estate plans on a regular basis and can provide you with the counsel you need.

If you need counsel, contact us. We’d be happy to help.