Trusts & companies – How entities own, buy & sell

Human beings aren’t the only persons who own, sell, buy, and mortgage real estate. So do firms and businesses. And don’t forget to add trusts, not-for-profits, and unincorporated associations. Taken together, these groups are often referred to as entities.

To legally exist, most entities must be formed according to state law. In many cases (in Indiana, at least), that means filing organizational documents with the secretary of state. Some would-be entities get forms online at the secretary of state’s website. Others hire lawyers to handle the particulars.

Among the types of entities that have to file with the secretary of state’s office are corporations (both for profit and not-for-profit), limited liability companies, and limited liability partnerships.

Entities that don’t have to file with the secretary of state to exist legally are partnerships, unincorporated associations, and so-called grantor or living trusts.

But, when it comes to entity-owned real estate, keep in mind that the entity itself is the owner, as opposed to the people who make up the entity. Human beings who are entity-owners (members, shareholders, managers) often forget this, thinking the entity they created is a mere formality. It isn’t. It’s the owner. So, for the entity to act officially, it must play by the rules it made for itself as outlined in its entity documents.

That means if an entity is borrowing or is selling, buying, or mortgaging real estate, title companies will ask for documents they don’t otherwise ask human beings for. For example, if Jim Jones is selling his house, the title company will be satisfied that Jim can sign the deed over to the buyer if Jim proves he’s Jim by showing a valid, government-issued photo ID. Jim won’t have to prove he exists (we can see and talk to him, after all, and match him up to his photograph). All he’ll have to do is link his physical person as the signer of the deed in this transaction to the name on the deed by which he took title to the house.

Not so with an entity. Unlike Jim, amorphous entities don’t have a physical existence. The entities’ owners do, but not the entities themselves. So, title companies need to verify the entities actually exist and can do what the entity is trying to do.

That means title companies ask for proof. For entities formed by filing papers with the secretary of state, title companies will want copies of those filed papers with the secretary of state’s seals and filing dates clearly visible. Because entities which file must renew their filings periodically or automatically cease to exist, title companies will need proof of that too.

There’s more. Because entities can’t do more than their official papers allow them to do, entities must prove they have the right to do what they plan to do (sell, buy, borrow, mortgage). And because entities can’t sign papers themselves – people involved with the entities must do that for them – title companies must have proof who the authorized signers are.

So, when a title company asks for copies of various documents and for an official entity resolution that authorizes the transaction and who can sign the documents, please don’t be offended or put up a fight. The title company isn’t trying to meddle in the entity’s affairs, only to verify that the transaction can proceed as planned.

Trusts are a little different, although the concept is the same. Most of the trusts title companies run into are formed by individuals and are revocable – meaning they can be cancelled at any time. These trusts spring to life with a trust agreement which doesn’t have to be filed anywhere (secretary of state, county recorder, or anywhere else). Usually, the reason trusts are created is to avoid probate. Although I’m painting with a broad brush here, when a person who owns real estate dies, heirs may have to go to court to determine who inherits the property. Trusts avoid this issue because the person (grantor) who forms the trust designates a beneficiary who becomes the owner automatically at the grantor’s death.

These trusts are a lot like wills and are not filed publicly. Unfortunately, what many owners (grantors) forget, is that once the real estate has been put into the trust, the grantors no longer own the property. Instead, the trust owns it (actually, according to Indiana Code 30-4-1-1, the trustee owns it). And, of course, what the trustee can and can’t do with the property (sell, buy, borrow, mortgage) depends on what the trust says. Which is why title companies have to see it.

Often, when title companies ask for copies of the trust, the trustee (who usually is the grantor) resists, thinking the trust provisions – who gets what when the grantor dies – are private and confidential. But, as with other types of entities, title companies need to know that the transaction is permissible and who is authorized to sign. Title companies don’t care who gets what at death, only that the i’s have been dotted and the t’s crossed so the transaction they’re handling will be valid. And, keep in mind that title companies need the whole trust, not just snippets here and there that the trustee thinks are pertinent. Because some clauses can override others, title companies need to see the whole shebang.

As for unincorporated associations – like some small churches – their existence may not be blessed by the secretary of state (although can be if the association files as a non-profit). But they still must have an organizational structure with rules about who governs, what types of actions the group can take, how decisions are made, and who can sign. So, title companies will ask for the same kind of paperwork, minus the official part from the secretary of state.

- Morrie Erickson