By Kurt Thoennessen, CAPI
An estate plan is typically designed to protect your assets from creditors, mitigate your liability exposures and reduce estate tax implications after your death. One estate planning strategy that has become popular is placing a personal residence into a Trust, Limited Liability Company (LLC), or Limited Partnership (LP). This is an effective strategy, however a critical step in the process is often overlooked that could negate any positive effects of the original plan. That step is consulting with a personal insurance specialist to ensure that this new ownership structure is accounted for in your personal insurance program.
Changing the ownership structure of your home
When you contribute a residence to a trust or other entity you are removing that residence from your name and placing ownership with the entity. Once you no longer personally own the residence, your homeowners insurance policy that lists you as the "Insured" needs to be updated.
Is the Trust or LLC an "Insured"?
The verbiage below is the definition of an “Insured” from a major national insurer's home insurance contract and is used by most insurers. This definition is used to determine if coverage is applicable at the time of loss.
"Insured" means you and residents of your household who are:
This definition does not include trusts, LLCs or LPs, which means these entities are not considered insureds. Therefore, any coverage that is afforded to an insured, through your policy, would probably not be given to a trust, LLC, or LP.
How will my policy respond?
The answer to this question may vary by insurance company and homeowners insurance contract. However, the contract language of one major national insurance company indicates that they will not provide coverage based on the following statement from the policy section labeled "Insurable Interest and Our Liability":
"In the event of a covered loss, we will not pay for more than an insured person's insurable interest in the property covered, nor more than the amount of coverage afforded by this policy.
Simply put, if your residence has been placed into a trust or LLC and you no longer own it personally, the insurer may question your insurable interest in the residence.
Other coverage considerations
Not only do you have to redesign your coverage to account for a new ownership structure that includes a trust, LLC, or LP, but you also need to give consideration to the areas of your coverage that are not affected by your estate plan. The reason for this is the fact that typically only the structures on the property are contributed to a trust, LLC, or LP, leaving your personal property, liability risk, and additional living expenses after a loss unaffected by the estate plan. Therefore, if you continue to live in the house after you place it in one of these entities, you will also need to structure your policy to provide coverage for these exposures as well. If your policy is not structured properly, you could be left with an unexpected gap in coverage.
Work with a personal insurance specialist
The most important thing to remember when you contribute a residence to a trust or place it in an LLC or LP is to inform your insurance adviser of this change in ownership. A personal insurance specialist will seek to understand the change in ownership and restructure your insurance program to ensure your coverage is properly structured and will respond as intended in the event of a loss.
About the Author
Kurt Thoennessen is Vice President of Ericson Insurance Advisors and a Certified Advisor of Personal Insurance (CAPI). Kurt works with clients and family offices across the country to develop and implement personal risk management and insurance programs. Kurt can be reached at (203) 405-2645 or firstname.lastname@example.org.
Kurt is developing a new technology platform to help owners of high value assets address the issues raised in this article, called InsureScope. Please visit insurescope.com if you would like to be notified when the site is launched.