Have a Trust or LLC? Be Sure Your Insurance Company Knows


It is becoming an increasingly common financial strategy for people to place the ownership of everything from bank accounts to real estate to boats or other property in a trust or limited liability corporation (LLC). Why? One reason is that a trust or LLC is a separate legal entity, which can have substantial estate-planning and tax benefits. For example, property in a revocable trust does not go through probate, it is instead passed directly to the trust’s beneficiary or beneficiaries.

Another reason for their popularity is that a trust or LLC can provide a liability shield; as the owner of any property within it, the entity is responsibility if there is a lawsuit, not the individual or partnership that set it up.

It’s important to note, though, that this is true only if the correct entity or entities are named as insured on your insurance policy. Here are a couple examples:

Example 1: Friendship Lost

Juan owns a beautifully restored vintage sailboat that he uses frequently to entertain friends and clients. His financial advisor suggests that Juan set up a revocable living trust so that when he dies, his grown son, who is the next trustee in line after Juan, can continue to enjoy the boat without going through the probate process.

During a sunset cruise, Juan’s friend Neil slips while walking aft and smashes his face on a tie-down bracket. In spite of medical efforts to save it, Neil loses his eye. He sues the owner of the boat—the revocable living trust—to recover damages. Unfortunately, Juan never listed the trust on his insurance. Juan is covered personally, but his trust is not. The boat must be sold to satisfy the legal judgment of more than $1 million. It’s only worth $290,000. So not only is Juan’s boat gone, Neil is unable to collect the full amount he was awarded, which prompts him to file a negligence lawsuit against Juan for how he maneuvered the boat that day.

Example 2: A Narrow Escape

Heather has a vacation home in Lake Tahoe that is owned by her trust. After enjoying the large cabin for many years, she tears the ligaments in her knee and realizes it’s time to put away her snowboard. Now that she’s not using the property as frequently, she decides to start renting the home to vacationers. So she sets up an LLC in order to distance her personal assets and transfers ownership of the property to the LLC.

One night a group of guests starts a roaring fire in the fireplace while enjoying some adult beverages. As the evening rolls on, most go to bed. But the last few diehards add more logs, knocking over the fireplace screen in the process. They decide shortly thereafter to hit the hay, too. The fresh logs catch, and a spark jumps onto a cotton hearth rug. A larger fire erupts that quickly engulfs the living room. The smoke detectors blare, and all of the guest get out, but the home is nearly destroyed by the time firefighters arrive.

Heather was careful when she first took out her insurance policy and named her trust as an insured party. However, when she moved the trust into the LLC, the LLC became the owner of the property. Her insurance policy did not list the LLC as a named insured. Heather’s loss was not covered by her insurance company.

Dealing with LLCs and trusts can be tricky business. LLCs can be formed by individuals or partnerships, and there are numerous different types of trusts (revocable or irrevocable, asset protection trusts, special needs trusts and spendthrift trusts, just to name a few).

Because they can be so complicated, establishing clear communication between your attorney or financial advisor and your insurance agent is key. It’s important to work with an insurance advisor who can ensure that all of your insurance policies are properly drawn up.

Kelly Klee’s agents have the expertise and experience to do this well. If you are considering or already have property held by a trust or LLC, call us at 844.885.1600 or click here to open a dialogue. We will work closely with you and your financial advisor or attorney to provide insurance coverage that is seamless.

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