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Indemnity Deeds of Trust
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Indemnity Deeds of Trust
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In General. Indemnity deeds of trust are a special type of deed of trust used in Maryland to avoid the immediate payment of recordation taxes. (For more information on recordation taxes, go to the recordation taxes discussion posted at this site.)
Indemnity deeds of trust are deeds of trust that are granted by someone other than the borrower–usually a guarantor. It is critical that the grantor under the deed of trust is not primarily liable for the loan and that the indemnity deed of trust secures the grantor's contingent liability and not the primary liability of the borrower. For example, an indemnity deed of trust which recites that it secures a note (as opposed to a guaranty) may not qualify as an indemnity deed of trust for purposes of avoiding recordation tax.
As a result, for most loans structured with an indemnity deed of trust, the documents will include at least a promissory note (from the borrower to the lender), a guaranty of the borrower's obligations under the note (from the landowner to the lender), and an indemnity deed of trust which secures the guaranty (also granted by the landowner to trustees, for the benefit of the lender). Additional documents may be advisable depending on the facts of a particular transaction in order to address fraudulent conveyance risks that can arise with the indemnity deed of trust structure. Fraudulent conveyance risks and related documentation concerns should be discussed with a lawyer before you decide to pursue an indemnity deed of trust structure and when drafting documents to reflect the indemnity deed of trust.
The use of an indemnity deed of trust does not necessarily eliminate the tax. At any time that the guarantor becomes liable, the tax would then be due and payable by the guarantor. If there never is a default, however, the guarantor should not be liable and no tax should be due. The Attorney General's office in Maryland has opined that the lien of an indemnity deed of trust is not affected by the failure to pay recordation taxes and that any claim that the State may have for unpaid taxes does not have priority over the lien of the indemnity deed of trust.
Transfer Taxes and Indemnity Deeds of Trust. In most cases in Maryland, transfer taxes are not due upon recordation of a deed of trust–whether it is a regular deed of trust or an indemnity deed of trust. This general rule is not true, however, in Prince George's County, Maryland. In Prince George's County, both regular deeds of trust and indemnity deeds of trust are subject to a county transfer tax on the amount secured. (For more information about transfer taxes, go to the transfer taxes discussion posted at this site.)
Recent Developments: The Read Case. The question of whether indemnity deeds of trust may be subject to recordation tax in some cases has been an issue of some debate in Maryland over the last year. In 1999, the Maryland Court of Appeals decided Read v. Supervisor of Assessments of Anne Arundel County, in which the court applied the step transaction doctrine to determine that taxes were due on an instrument under the Tax-Property Article of the Maryland Code. The Read case did not involve an indemnity deed of trust but the circuit court clerks who accept documents for record in Maryland and who initially determine whether a tax is due, are familiar with the Read case and have, on at least one occasion, used it to assess taxes upon the recordation of an indemnity deed of trust.
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