Affluent individuals are often advised to put assets into trusts and LLC’s for wealth preservation, tax mitigation and wealth transfer. When trusts are created and trustees appointed, the applicable personal lines insurance policies must be amended to ensure there is adequate and appropriate protection for everyone involved.
Key Insurance Issues.
WHO IS A NAMED INSURED?
Most personal lines insurance policies define the “Insured” as the policy holder and family members, sometimes extending this to “a person or organization with respect to their legal responsibilites for acts or omissions of you or a family member.” Because this definition typically does not include trusts (a legal arrangement in which an individual gives fiduciary control of property to a person or institution [the trustee] for the benefit of beneficiaries), unless the trust is specifically listed as an additional interest on the policy there may be no coverage for the trust. Since all the terms and conditions of insurance policies are “frozen” at the time of a loss, retroactively amending the policy to include coverage for the trust is essentially not possible. This could have significant tax implications if the insured property is held in an irrevocable trust, which is not intended to be taxable in the insured’s estate. If the irrevocable trust has not been properly added to the policy, the insurance proceeds would be paid to the named insured, thus returning assets to the taxable estate.
NON-FAMILY BENEFICIARIES
Trust beneficiaries who are not family members should be named as additional interests, especially if they are living in the household. If the insurance company declines to include coverage for such beneficiaries on the policy, their personal possessions and third party liability should be covered under a separate renter’s policy.
EXCESS LIABILITY
The trust should also be named on any excess liability policy if it contains significant assets not protected from possible creditors.
LIMITED LIABILITY COMPANIES (LLCS)
Limited liability companies are by definition commercial entities (whereby the LLC owners, members and managers have the limited liability of a corporation) with the generally favorable tax consequences of a partnership. Personal insurance policies generally do not extend to commercial entities, although some insurers may be willing to consider adding a limited liability company as an additional interest. Generally, only commercial coverage may be available; a commercial policy is different from a personal policy and so should be reviewed carefully to ensure it provides the desired protection.
TRUSTEE LIABILITY
Individual trustees are generally not covered under their own personal lines insurance policy for trustee and fiduciary liability. Separate trustee liability coverage may be available. Alternatively, engaging a corporate co-trustee is a good option for individuals who may be asked to serve as trustees for a close family or friend’s trust. The corporate trustee’s insurance coverage can usually be extended to shield the private individual trustee from liability.
SUMMARY
Individuals who set up trusts of any kind must confirm with their insurance and other professional advisors that all relevant personal lines insurance policies have been appropriately amended to provide the necessary protection for all interested parties.
Chartwell Bulletins are produced by Chartwell Insurance Services, Inc. an independent insurance broker specializing in the personal asset protection of high net worth individuals. Chartwell Bulletins address issues of general interest and since coverages vary by company and by state, should not be taken as an interpretation of a particular policy or advice on any individual situation. A representative of Chartwell Insurance Services, Inc. will be pleased to discuss all aspects of your personal insurance.
Contact: Rebecca Korach Woan | 312. 645.1200 | rwoan@chartwellins.com