How to Make Sure Your Home is Insured if You Have a Revocable Trust

With the recent disasters in the state of CA, people who lost homes are currently filing claims with their insurance companies.  There have been many references in social media and on various platforms discussing the need for adding property as an additional insured.  Read below to better understand how you can better protect your real property. 

Homeowners who place their property in a revocable trust don’t realize they may be creating a dangerous insurance coverage gap.  With recent disasters it is imperative that you understand what to do to avoid potential denials in claims. In this post, I break down what you need to know to protect your investment and why this simple update to your policy is essential.

Why You Need to Name Your Trust as an Additional Insured on Your Property Insurance

When you place your property in a revocable living trust, you’re taking an important estate planning step. However, many property owners overlook a crucial detail: updating their insurance policies to reflect this change in ownership. Understanding why you need to name your trust as an additional insured is essential for maintaining proper coverage and protecting your assets.

The Legal Framework: Property Ownership and Insurance

When you transfer property into a revocable living trust, the trust becomes the legal owner of the property, even though you maintain control as the trustee. A revocable trust is a see through entity for tax purposes and does not provide any additional liability protection.  However, placing your property in a trust may create a disconnect for insurance coverage.  The property’s legal owner (the trust) is now different from you (an individual) if you are the named insured on your insurance policy. Insurance companies are becoming very particular about ensuring that the named insured matches the legal owner of the property.

Why This Matters: The Risk of Denied Claims

Insurance companies may try to deny claims if there’s a mismatch between the property’s legal owner and the named insured on the policy. Here’s why:

Insurance policies operate on the principle of insurable interest – you can only insure property in which you have a financial stake. Although it has been widely understood that you are still the beneficial owner of the assets for income tax, estate tax and liability purposes, insurance companies may argue that  when you transfer property to a trust, you technically no longer own it as an individual. Instead, the trust owns it, and you manage it as the trustee.

Many people believe that since they are the trustee of their revocable trust, additional insurance coverage isn’t necessary. However, insurance companies view the trust as a distinct legal entity, regardless of your role as both grantor and trustee. Thus adding the trust as an additional insured is one method of ensuring that all parties and entities align.

Real-World Implications

Consider this scenario: You transfer your home into your revocable living trust but don’t update your homeowner’s insurance policy. A significant loss occurs, and you file a claim. The insurance company’s investigation reveals that the trust, not you individually, owns the property. This mismatch could give them grounds to attempt to deny your claim, leaving you financially exposed. It would be in bad faith if they were to deny the claim as they have already knowingly insured the property and have access to how it is titled in public records.  However, this is not a risk that you want to take especially when the insurance industry is facing unprecedented challenges that threaten its stability and sustainability.

The other scenario is that if you were to perish in the disaster, and the insurance company was willing to pay out to you individually, those monies would have to go through probate before getting to your trust.  With the trust as an additional insured, could be paid directly to the trust and those monies would avoid needing to be probated. 

The Solution: Adding Your Trust as an Additional Insured

To maintain seamless coverage, you should:

  1. Contact your insurance agent immediately after transferring property into your trust
  2. Request that the trust be added as an additional insured on all of your policies including your landlord coverage for rental properties and even earthquake insurance.  According to some insurance carriers, umbrella policies can remain in your own name.
  3. Ensure the trust’s name is listed exactly as it appears on your trust documents
  4. Obtain written confirmation of this change from your insurance company

Additional Benefits

Adding your trust as an additional insured:

  • Ensures continuous coverage without gaps
  • Protects both you and the trust’s interests
  • Maintains the integrity of your estate plan
  • Prevents potential claim denials
  • Provides peace of mind knowing your assets are properly protected

 Conclusion

While it may seem like a minor detail, naming your trust as an additional insured is a crucial step in protecting your assets. The small effort required to update your insurance policies pales in comparison to the potential financial impact of a denied claim. As with all aspects of estate planning, attention to detail matters. Consult with your insurance agent and estate planning attorney to ensure your trust and insurance arrangements work together seamlessly to protect your assets.

Remember: This is not just about following a legal formality – it’s about ensuring that the careful estate planning you’ve done through your trust isn’t undermined by an insurance coverage gap. Take the time to review and update your policies today.

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