When is a trust not especially trustworthy, or a limited liability corporation not particularly effective at limiting liability? Answer: A lot more often than most high-net-worth individuals probably realize.
Wealth managers and estate planning attorneys are usually quick to recognize trusts and LLCs for what they are: asset distribution vehicles that can offer significant protection from tax and personal liability. What they tend to overlook, though, are the serious but less obvious challenges of insuring such legal entities.
An integrated coverage approach to insuring not only the trust or LLC, but also the clients who establish them, is essential. Some clients, for example, assume insurance coverage for a trust or LLC eliminates the client’s need to retain personal liability coverage when, in actuality, liability coverage in the name of either entity is limited to the property (house, cars, etc.) within that trust.
Similarly, when it comes to protecting personal contents contained in a home, the trust may not have an “insurable interest” in them. If this is the case, the trust may not have a legitimate claim in the event of a loss.
Clients need to appreciate that legally transferring ownership of certain personal assets to a trust or LLC doesn’t necessarily end their exposure to lawsuits for activity arising from those assets. Many high-net-worth clients who assume otherwise may eliminate personal liability insurance in their name, not realizing this leaves them exposed to out-of-pocket costs for legal defense and potential judgments against them.
Consulting with an insurance professional who can work together with the client and his/her legal counsel to establish an appropriate insurance program is essential.
Among the complicated issues clients need to work through with legal counsel and insurance professionals are: What is the purpose of utilizing an LLC or trust vehicle? Is the “named beneficiary” of the trust/LLC coverage using and controlling the property insured through the trust? Is the trust being used for a purpose that may create additional liability for a named beneficiary? Is the trust actively acquiring and liquidating assets? Any of these conditions can impact the strength or weakness of claims that may eventually arise.
Whatever the reason a client chooses to establish a trust or LLC, the insurance program should never inadvertently take away protection from the person or persons who deemed it beneficial to create such an entity. Yet, that’s exactly what sometimes occurs.
Imagine a client is displaced by a fire from a home covered under a policy written solely in the name of trust. In such a scenario, the policy would not address the client’s temporary housing and living expenses, as a personal homeowner’s policy in the client’s name would.
Many well-to-do families take a position that their business–personal or professional–must be kept confidential at all cost. They use trusts and LLCs as ownership vehicles for personal property, to protect their anonymity and to shield their assets from nuisance civil actions by opportunistic litigants. Ironically, from an insurance perspective, “leaving their name out of it” can leave them more vulnerable to claims of liability and other insurable exposures.
There are options to help ensure such gaps are eliminated while not damaging the legal strength of separation between the individual and the entity. However, such options may require clients who move assets to trusts and LLCs to forego anonymity, at least on their personal liability policy.
For a trust or LLC that is seeking to acquire and dispose of assets, clients need to consider that they may need more protection than personal insurance, alone, can afford. If a trust or LLC creates a commercial exposure, it is wise to seek an insurance agent or broker who can evaluate the big picture and the personal/business risks that result.
Anything less is an uncovered accident waiting to happen.
Andrew McElwee, EVP of Chubb & Son and COO of Chubb Personal Insurance, is a regular contributor to Wealth Manager.