Question: So many brokers have different thoughts, policies and practices on when Trustees must fill out the TDS, SPQ and NHDS (collectively referred to as the “TDS”) that it is difficult to have smooth transactions. Can we stop arguing over the “sole trustee?!”
Answer: YES. For many years, brokers and attorneys have debated this and have repeatedly requested a statutory change. The state Legislature has passed, and the Governor has signed, a CAR-sponsored bill removing the word “sole” from the statute. Under the revised statute, for purposes of determining if trustee(s) are exempt from completing a TDS, it no longer matters how many Trustees there are or the relationship between the Trustees.
A BOTTOM LINE: All Trustees are exempt from completing a TDS unless (1) the trust is a revocable trust; AND (2) the trustee is a natural person (meaning a live human, not an institutional trust department, for example); AND (3) the trustee either owned the property in their own name OR occupied the property within one year of the date of the sale.
B. MORE DETAILED EXPLANATION: The three new requirements as to whether the Trustee is Exempt from completing the TDS, or is Not Exempt, are determined by whether all three of the following questions can be answered YES. A single NO means that the Trustee is Exempt and does not complete the TDS.
- Is this a Revocable Trust? If YES, answer the next question. If the answer is NO (it is an irrevocable trust), no further questions need to be answered because the Trustee is Exempt. The Exempt Trustee does not complete the TDS but must still make full and complete disclosure of known material facts using the Exempt Seller Disclosure (“ESD”).
- Is the Trustee a live human being (i.e., not an entity)? If YES, answer the next question. If the answer is NO (the Trustee is an entity), no further questions need to be answered because the Trustee is Exempt. The Exempt Trustee does not complete the TDS but must still make full and complete disclosure of known material facts using the ESD.
- Has the Trustee EITHER owned the property in his or her own name OR lived in the property within one year of the date of the sale? If the answers to all three questions are YES, the Trustee is NOT EXEMPT and must complete the TDS. If the answer to this or any of the other questions is NO, then the Trustee is Exempt and does not complete the TDS but must still make full and complete disclosure of known material facts using the ESD.
C. MULTIPLE TRUSTEES — EACH MAY HAVE TO BE TREATED DIFFERENTLY: If one, but not all, of the Trustees is exempt from completing the TDS, but the other Trustee(s) are not exempt, the best practice is to have the Trustee(s) who are obligated to complete the TDS do so and to sign that documentation, BUT the Exempt Trustee(s) should just complete an ESD.
EXAMPLE 1: Mother and son are Trustees of a Revocable Trust. Neither has ever owned the property in their own name but Mother lives in the property. Since, in this example, the son has never lived in the property and was never on title in his own name, he would not complete or sign the TDS but the Mother would complete and sign the TDS. Should he disclose his knowledge? YES; he just would not use the TDS to do so and is not obligated to sign the Mother’s TDS. The Exempt Son would complete and sign the ESD.
EXAMPLE 2: One Trustee of a Revocable Trust is an individual who lives in the Property but the other Trustee is the Wells Fargo Trust Department. The individual Trustee meets all three requirements to be required to complete the TDS, and that individual Trustee would complete and sign the TDS; the Trust Department, not being a “natural person,” would not complete or sign a TDS but should complete and sign the ESD.
The current Trust Advisories that are used by CAR, PRDS and others all need to be modified to reflect this change in the statute and such revised Trust Advisories should be used in connection with all transactions that are to close on or after January 1, 2019.
PRACTICE TIPS:
- Remember that ALL Sellers of ALL properties of ALL kinds must disclose to Buyers ALL conditions and defects known by the Seller affecting value or desirability. Thus, whether a Trustee is Exempt from completing a TDS or not, ALL Trustees have the same disclosure obligation regardless of the paper on which the disclosures are made.
- If a Trustee is Exempt from completing a TDS, DO NOT have the Trustee complete a TDS form, or the TDS supplement. Attorneys for Trustee/Sellers may later allege in a claim or lawsuit that any false or incomplete answers in the TDS would not exist but for the Listing Agent requiring the Seller to complete a badly-written statutory form; further, since the TDS form indicates that there is a 3-Day right to rescind which is not applicable to exempt transactions, it should not be used by Exempt Trustees.
- Provide the Seller with the Broker Risk Management-created SELLER ADVISORY REGARDING COMPLETING THE REAL ESTATE TRANSFER DISCLOSURE STATEMENT AND OTHER SELLER DISCLOSURE FORMS (“Advisory”) at the same time as providing the blank disclosure forms regardless of whether the TDS or the ESD is used.
- Send the ESD and the Advisory to the Seller with a copy of the TDS and SPQ (or the Supplement specified in the Purchase Agreement) — with those two disclosure forms marked SAMPLE — for the Seller to use as a guide – but not to answer or sign. Those samples can then remind the Exempt Seller about the various topics that they need to disclose (i.e., everything they know).
- Use the Revised Trust Advisory for transactions closing on or after January 1, 2019! It is a good tutorial for the clients as well as the real estate professionals. Although it has signature lines for both the Buyer and Seller, both principals do not need to sign the same document (it can be signed in counterpart) and the Trust Advisory does not need to be provided to the other Broker’s clients.
This Weekly Practice Tip an attorney client privileged document and is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright 2018 Broker Risk Management 10/05/18