Keep Your Insurance Agent in the Loop
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.
When the topic of naming a trust as the insured comes up as part of the process for setting up a revocable trust for a client (and retitling assets as a result), it’s 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 an “additional insured.” Legally, the trust should be considered the “loss payee.”
It’s important to remember there isn’t one universal approach to listing a trust on a homeowner’s policy. In fact, the way it’s treated and the coverage extensions to the trust vary greatly from carrier to carrier. Historically, carriers underwrote 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 from carrier to carrier. Now that estate planning is more common practice, carriers are adapting and changing their forms to include trusts, hence why 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, a 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, as, 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, if applicable, your spouse. This will also include residents such as relatives and children. In most homeowner’s policies, or “forms,” a trust listed as the named insured will be protected for damage to the insured premises, personal property and liability exposure. If the trust isn’t 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., because occupants of the trust-owned dwelling are not a “you” or “your.”
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 are defined and what the differences in coverage extended to each are. The named insured will always have the broadest of the three with regard to coverage.
Typically, loss payees are those who have an interest in the tangible property. This is why they’re 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’re lending against is covered in the event of a loss. Loss payees are notified at the time of a loss so that 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 effect this change by including a separate endorsement adding the trust as an additional insured. The coverage for the trust is limited to its interest in the property and premises liability.
A trust can be an effective way to manage your estate taxes and provides other benefits as you build your estate plan. As with any financial planning, it’s a good idea to surround yourself with experts (including an estate attorney, a financial advisor and a tax professional) to help you navigate the legal and financial implications. Need help getting on solid footing with your estate planning? Start by requesting a meeting.