Estate planning attorneys often recommend that you transfer your assets into a Living Trust (also called a Revocable Trust). This process is sometimes called “funding” the Trust. By transferring assets into the Trust before death, you can avoid–or at least minimize–probate.
The assets transferred into the Trust will include both real and personal property. These types of assets are often covered by insurance. So what happens if a person transfers their insured property out of their name and into the name of the Trust? Some insurance experts agree that this can create a possible scenario where the insurer denies a claim in the event of a loss. This is due to the fact that the insured, i.e. the person who owned the property, does not technically own the property in their name anymore.
An example is in order. Let’s say that Jim owns a house and it is insured by a homeowner’s policy covering fire, casualty, etc. Under the policy, the insured is Jim so if the property is damaged by fire, Jim submits a claim as the insured and the company should pay his loss. But what if Jim transfers the house into his Trust? If the fire happens at that point, the house is owned by the Trust and the Trust is not the insured–as a result a coverage defense could arise. Although such a defense would be a technicality, why take the risk?
So what is the answer to avoid this scenario? The ideal remedy is for Jim to have his insurer add the Trust as an additional insured on his policy. Doing this, the coverage issue goes away since the Trust is covered as an additional insured.
Fortunately, many insurance companies are glad to add the Trust as an additional insured and in most instances, there is no additional charge for doing so. If you ask to add your Trust as an additional insured, make sure you get a policy rider evidencing the coverage.