What is the Trustee's Role in an Indemnity Deed of Trust?
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Answer:
An indemnity deed of trust (IDOT) is a real estate recordable document used in Maryland to avoid payment of recordation and transfer taxes in real estate transactions. The state and each local jurisdiction impose recordation taxes and transfer taxes on the recordation documents that transfer an interest in land. Recordation and transfer taxes are due when the deed of trust is recorded. The taxes are based on the consideration passing under the document to be recorded, which is usually the amount of the debt secured.
Indemnity deeds of trust are deeds of trust that are granted by someone other than the borrower–usually a guarantor. In this type of deed, the grantor under the deed of trust is not primarily liable for the loan and the indemnity deed of trust secures the grantor's collateral interest and secondary liability and not the primary liability of the borrower. The owner who is giving the deed is not the primary oligor. Indemnity deeds of trust would not be used in a purchase money transaction or a refinance. An indemnity deed of trust and deed of trust are distinguished by the recitals in the indemnity deed of trust that establish the indemnification relationship.
In an indemnity transaction, an entity related to the landowner borrows money and contributes or loans the proceeds of the loan to the landowner. The landowner guarantees the borrower's repayment of the debt and secures its guaranty obligation by an indemnity deed of trust. Because the guaranty obligation is not then due, there is no taxation of a current debt.
To avoid recordation tax, the IDOT must have a grantor that is not the same as the maker of the note, the grantor must have signed a guaranty of the note, and the IDOT must secure only the guarantee.
It is common for the lawyer or someone at the law firm to be the designated person to be the trustee unless the lender wants someone else, like a bank officer. The trustee holds a technical form of title. In simple terms, the obligation of the trustee is to reconvey title when the loan is paid off, or to commence foreclosure in the event of default.
The trustee therefore helps clear title to real property when the loan is repaid, and helps lenders protect their security in the unfortunate circumstances of nonpayment. While the laws permit lenders to seek foreclosure in court, normally trustees act under a power of sale granted in the indemnity deed of trust to foreclose non-judicially. This reduces expenses for all parties.