Retirement and estate planning ultimately have to do with understanding taxes and how it will affect future income. When navigating this exciting tax journey, the ownership of assets will most likely change overtime, from parent to sibling, or from an individual to a trust. Ultimately, if not correctly managed the changes that will benefit your tax situation may have serious consequences for uninsured insurance claims.
The dream has come true for Tom and Brenda, they have worked for years in San Diego and acquired assets totaling $6,000,000 in cash, a home and a beautiful boat. Then tragedy struck and their last living parent passed away. They were not ready for this and saw firsthand the headache that would follow since the estate was not in a trust. After the long process of probate was complete Tom and Brenda decided to have a meeting with their new estate attorney. The attorney advises creating a trust and put the assets in the trust. They proceed and appoint Brenda’s younger sister as trustee, but no other changes are made. No changes are made to the insurance policy. The named insured listed on their homeowners, and boat insurance policy are not changed.
4 months go by since they moved their assets into the trust and the dreaded California fire season is in full swing. Tom and Brenda cleared all the brush around their home and even had a sprinkler system set up for perimeter defense. Incredibly with the heavy winds a hot ember made its way down the fireplace and ended up burning the entire home from the inside along with all their personal property. They filed a claim with their insurer and the carrier makes a check payable to the owner of the property. The problem is the home is not owned by Tom and Brenda because it was transferred into a trust 4 months ago and they failed to inform their agent. The legal owner of the home is the trust. The claims adjuster cannot give the check to Tom and Brenda and deny the claim.
The claim is not covered because a “trust” or “trustee” is not an insured on an unendorsed insurance policy. The trust was not listed on the insurance policy and Tom and Brenda are not the owners of the property, so their insurance policy is not triggered. They cannot rebuild and their estate loses $4mil in the home and personal property.
What is the solution when the home is titled to the trust and you have the grantor, or individuals still occupying the residence?
Insurance Services Offices Inc or ISO created an industry endorsement form known as the “Residence Held in Trust” endorsement (HO 05 43). When endorsed to the homeowner’s policy, the trustee and trust are listed on the Declarations page as a “named Insured”. While this endorsement provides some coverage it is not the complete coverage we are looking for. This only provides coverage while on the residence premise.
What happens if a claim arises away from the residence premise?
An argument can be made Tom and Brenda own the trust so a carrier would step up and cover their claim. However, do you want to leave the claims interpretation up to the company? Is that a risk you or your client are willing to take?
Knowing who is covered and where they are covered under the policy will help keep the assets in the trust protected. In short, have a conversation with your insurance agent about who should be listed on the insurance contract. When the home is transferred into a trust it is good practice to name the trust and trust owners as “named insureds”. This extends the same benefits of the insurance policy to both parties.
