Why it’s important to tell your insurance agent if you put your assets in a trust, LLC or other entity.
More and more often individuals are using trusts and other types of non-individual ownership structures to protect and distribute their wealth. A potential issue with these types of ownership arrangements is that listing a trust or an LLC as the named insured (policyholder) may potentially limit coverage for the individuals who reside in the property.
Recently, our advisory team was visiting with Cory Wessman, a shareholder in the estate planning firm, Erickson & Wessman, P.A. The topic of naming a trust as a named insured arose as part of the process for setting up a revocable trust for a client and retitling assets as a result.
Cory indicated that it is best practice “for the client to contact his or her property insurance company and indicate to the insurance provider that the trust is the owner of the policy, such that the trust is the “additional insured.” Legally, the trust should be considered the ‘loss payee’.”
We also visited with Dan Schuler, Founder and Principal of Paragon Companies, a Minnesota- based property and casualty insurance company. Dan shared, “It’s very important to remember there isn’t one universal approach to listing a trust on a homeowner’s policy. In fact, the way it is treated and the coverage extensions to the trust very greatly carrier to carrier. Historically carriers underwrite the ‘insureds’ or occupants of a home along with the factors of the structure itself when determining eligibility and premium of the risk. As an entity, a trust, isn’t always able to be added to a homeowner’s policy as the entity doesn’t fit the definition of an insured, but as previously mentioned this varies carrier to carrier. Today, now that estate planning is more common practice, carriers are adapting and changing their forms to include trusts, hence the statement it’s important to know how the specific carrier insuring the property looks at a trust.”
For a number of folks, placing your residence inside a trust, more often a revocable trust, is a convenient way to allocate ownership of your assets between spouses, or make distributing your estate simpler for your heirs, or in some cases, both. It also allows your assets to pass to your beneficiaries without going through probate. Often, an estate planning attorney, your tax professional, or a financial advisor might have you consider placing some or all your assets in a trust.
One important piece to this strategy is investigating how it will affect your personal insurance coverages, since in many cases to be eligible for a homeowner’s policy, a dwelling must be occupied as a residence by the property owner. When your policy lists the “you” and “your” terms in the policy definitions, this is generally referring specifically to the insureds, namely you and your spouse. This will also include residents such as relatives and children. In most homeowner’s policies, or “forms”, a trust listed as named insured will be protected for damage to the insured premises, personal property, and liability exposure. If the trust is not listed, you should consider adding the trust as an additional insured.
Under this arrangement, the trust becomes the “you” in the definition. When a trust owns the personal property, the occupants may not have coverage while using the trust’s personal property away from the premises. There are other potential gaps in coverage due to current policy language, such as loss of use, property of others in their care, etc. for because occupants of the trust owned dwelling are not a “you” or “your”.
Dan shared the following as well, “Another thing to be conscious of is the difference between an additional insured and a loss payee.” The policy in question needs to be reviewed to know how the “named insured”, “loss payee”, and “additional insured” is defined and what the difference in coverages extend to each is:
- The named insured will always have the broadest of the three with regards to coverage.
- Typically, loss payees are those whom have an interest in the tangible property. This is why they are listed on property with liens such as automobiles. The property is secured by a note and the lender wants to be sure the asset they are lending against is covered in the event of a loss. Loss payees are notified at the time of a loss so the loss payee can be sure the property is repaired or replaced.
- Traditionally an additional insured is also a loss payee on most personal property forms.
When a trust is listed as a named insured in addition to the occupants, this makes everyone an insured and all would have liability and personal property coverage while still covering the insurable interests of the trust. Sometimes an insurance company might affect this by including a separate endorsement adding the trust as an additional insured. The coverage for the trust is limited to their interest in the property and premises liability.
If you have a trust which owns your residence, contact your property insurance agent and indicate that a trust is the owner of the policy, such that the trust is the “additional insured.” Legally, the trust should be considered the “loss payee.”
A trust can be an effective strategy to manage your estate taxes and provides other benefits as you build your estate plan. As with any financial planning, it is a good idea to surround yourself with experts including an attorney, your financial advisor and your tax professional to help you navigate the legal and financial implications. Need help getting on solid footing with your estate planning? Start here.
The views and strategies described may not be suitable for all investors. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for accounting, legal or tax advice. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.
The views expressed are those of BerganKDV Wealth Management. They are subject to change at any time. These views do not necessarily reflect the opinions of any other firm. Investment advisory services and fee-based planning offered through BerganKDV Wealth Management, an SEC Registered Investment Advisor.
