Protecting Assets Owned by a Trust: Is Your Trust Named as an Insured?
August 13, 2015
Trusts are commonly-employed structures for wealthy families. To manage estate taxes as part of an overall estate planning strategy, it is common to transfer ownership of a home from an individual to a trust. However, this well-intended strategy can have potentially disastrous outcomes by creating exposure to potential uninsured claims. In the event of a loss, insurance policies will only pay those specifically named in the policy. If your trust is the new legal owner of the home, it must be added to the policy as an additional insured.
An example illustrates this risk best:
You have worked diligently with your estate planning attorney to address each of the important goals you have for your family. Your attorney has recommended that you transfer ownership of your assets, including your home and personal property (which includes your treasured collection of cars), to a trust in your name. Your property and liability insurance policies, however, are not updated to include the new trust as an additional insured under the policy coverage. The homeowners and umbrella policies only name you and your spouse as insured.
You experience the following insurance claims:
A devastating fire destroys your home and all of your personal items. The replacement cost of the property is $3 million—the same as the insurance coverage. The insurance adjuster, when delivering the $3 million check, requests a copy of the title. He sees that the title to your home and the household personal property are owned by the trust, and rips up the check on your driveway. Your estate value is now reduced by the amount of money required to rebuild your home. Ouch!
In the same fire, a next-door neighbor suffers serious third-degree burns. He sues you and the owner of the home—the trust—for $2 million to cover medical expenses and years of lost wages. The homeowner’s policy and your $2 million umbrella policy can only defend you, because the trust isn’t covered under the definition of “insured” in the homeowner liability coverage. Your assets are further drained by the amount of the insurance gap between you and the home.
You take your friend for a pleasure ride in an antique race car along Route 1. You have an accident and your friend is seriously injured. He sues you as an individual and the owner of the car – the trust – for $1 million for negligence. Again, your homeowners and umbrella policies will defend only you because the trust is not listed as an “insured” under either policy. Your remaining estate value is at risk of further depletion.
By properly including the trust to your homeowner and liability policies, these very expensive uninsured risks can be avoided. If the insurance agent had included the new trust as a named insured on both the homeowner and umbrella policies, all three claims would likely have been fully covered, including any defense costs.
The fix may be as simple as giving your insurance agent the name of your trust, but in most situations you will also want to consult with your estate planning attorney. Having these two professionals working together ensures that your overall insurance and estate planning strategies are intact and aligned, and the coverage you already have in place is doing its job.
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