There’s no need to dwell on the importance of homeowners’ insurance. You’ve probably figured out by now that you should never go without it. Today, I want to talk about trusts and how (or whether) to coordinate home insurance when trust has been created.
A trust is a fiduciary arrangement that allows a trustee to manage assets for the benefit of beneficiaries. There are different types of trusts and their benefits vary, but they are an attractive option for homeowners who wish to transfer their home and other assets to their loved ones and heirs without having to go through the costly and time-consuming public estate process.
Creating trust is a relatively simple process that can provide significant benefits to heirs beyond the tax advantages.
Unfortunately, there are new issues that arise with respect to homeowners’ insurance and trusts. Before insuring your home or apartment, there are some important facts you need to know, including how to get the right amount of insurance for comprehensive coverage.
Good journalists and investigators know the five W’s. By answering these questions, you can get a good idea of the situation. Let’s look at home insurance and trust companies from this perspective. Finally, we’ll ask you one more bonus question so you really know everything.
Who is covered by home insurance with a trust?
This is the most important question. All too often we receive a claim and find that we can’t settle the claim because there is a problem with the “who” of the home insurance. Insurance policies are written with great care. In your household insurance, you, your spouse, and possibly your family members are almost always insured. However, as soon as the house is placed in the trust. The insurable interest in the house disappears and insurance is no longer available.
Here’s a scary example. One night you wake up smelling smoke. You quickly take control, wake up your spouse and leave the house as quickly as possible, taking your dog and a few belongings with you. Fortunately, your neighbor has already called the fire department, which arrives a minute later. They were able to put out the fire, but several rooms in the house were damaged. They asked for compensation for the damage but were told that they would only be compensated for their personal belongings. The damaged structures will not be compensated.
If you have your home managed in trust, one of the first steps is to include the trust company in your homeowners’ insurance and possible roof insurance. We’ll discuss this approach in more detail later.
What does home insurance through a trust cover?
If the policy is properly renewed, homeowners insurance covers the home, the property in the home, damage to the property of others, and liability issues arising from the insured property inside and outside the home.
The challenge, however, is that you must ensure that everyone involved has these measures in place at the same time. As the previous example shows, it is possible to live in a home that is not insured. If a trust is put in place, the original owner remains in the home. In most cases, until he or she voluntarily leaves or dies.
If the administrator accidentally leaves the tub on and walks away, problems will soon arise. As water overflows and seeps into the floor, the expensive woodwork begins to bend. Water also seeps into the main floor living room, causing the ceiling to collapse and damaging expensive furniture. Do you know what’s covered?
If the homeowner’s insurance is not renewed properly, only the furniture is covered. That’s it. The trustee is financially responsible for repairing the house or accepting a financial loss.
Where does coverage extend?
Standard homeowners insurance covers the entire house, the premises, and any place where the insured property is moved. For example, let’s say a trustee leaves a kayak with a neighbor on a lake. However, the kayak is defective and causes an accident in which the kayaker is permanently injured. Are such accidents covered by insurance?
That depends on the circumstances. If the neighbor sues for damages, the owner of the kayak (the trust) will bear the legal costs and any settlement costs. However, the trust is also named in the complaint and, if not properly included in the policy, is responsible for its own legal fees and possible damages.
When does the insurance coverage end?
If your policy is properly renewed, you should not expect the insurance coverage to be terminated. Therefore, it is important to consult with an insurance broker as well as an experienced trust attorney. The wording of the insurance policy is very important and, as these examples show, the wrong approach can result in significant losses.
It is also important to update the insurance policy promptly. One of the benefits of a trust is confidentiality, but that confidentiality is of little use if the trustee loses the trust assets and his or her own financial stability because he or she is not insured. The creation of the trust and the renewal of the insurance policy should be closely linked.
Why can’t a policy be issued in the name of the trust?
While it may seem like a good idea to put the homeowner’s insurance in the name of the trust, the reverse is also true. Although the legal ownership of the property has changed, the risk or danger to which the property is exposed does not change significantly when an individual transfers the property to the trust.
If the insurance is in the name of the foundation, liability insurance does not apply. If someone is injured on the site. Because the trust is named as the beneficiary of the policy, there is no protection against legal judgments or legal costs under a normal homeowner’s policy, and you could be held personally liable.
There are also personal property issues. If the trust owns the house and you own the family property, you could find yourself on the losing side if the house and everything in it are destroyed (fire, tornado, etc.).
How can we all be protected?
Trust funds are a good idea not only to protect the privacy of your heirs but also to protect the value of the assets you leave them. Unfortunately, there is no magic bullet to ensure that all parties are protected when your home is put into trust. The insurance industry is growing rapidly, but here’s what you need to know before you get started.
Maintain the policy in your name as it existed prior to the creation of the trust and list the trust as “excess insurance”. This means that the name of the trust must appear in the policy. Also, the trust itself must be mentioned in the policy. Note that the wording must be specific. Simply adding the word “trust” is not considered a “what” or a “to whom”. Only the “who” can be included in the policy.
If you properly include the trust company in your policy, you can get full liability coverage as well as coverage for the furniture that you need. In this case, the trust is protected from liability issues that arise within the dwelling but remain protected from issues that arise on undeveloped land or land leased to others. To protect trust in these circumstances, you must work with your attorney to consider the needs of the trust.
There are many advantages to creating a trust, but if not done correctly and with the proper insurance, it can have disastrous financial consequences that can render the purpose of creating a trust completely defeated.
Don’t make any decisions about insuring property transferred to a trust or property you wish to transfer to trust until you have discussed your options and best scenarios with an insurance agent experienced in home and trust insurance.
Lily Poole is a Property and home insurance broker Brooklyn by profession. She is pretty well experienced in the insurance and accounting field. Further, she has an impressive profile in the training and development industry.