Protecting Your Home: Insurance and Revocable Trusts
As we continue examining the financial aspects of homeownership, one key area to address is insurance, particularly when a home is held within a trust. This information aims to provide clarity on a potential issue, ensuring homeowners understand the importance of properly insuring property held in a trust.
This article builds upon previous discussions related to wills, trusts, and overall financial planning. The following guidance comes from legal professionals and a consumer advocacy group.
The Issue
United Policyholders, a California-based consumer advocacy group, brought an important point to light. After devastating wildfires in California, some homeowners who established trusts to pass on property faced claim denials because the trust wasn’t listed on their insurance policies. This oversight can have serious consequences, potentially leaving homeowners struggling to repair or rebuild their homes.
The Recommendation
To avoid this issue, United Policyholders recommends that those with property held in a revocable trust ensure the trust is listed as an “additional insured” on their homeowner’s insurance policy. Failure to do so, according to the group, could give an insurance company grounds to deny a claim due to lack of insurable interest. This could potentially force homeowners into costly legal battles.
Expert Opinions
To get a clearer understanding of the topic, I consulted with legal experts. Professor Gerry Beyer, the attorney from the “Death Checklist,” provided a simple and decisive endorsement:
“This is excellent advice!!!”
He further clarified that adding the trust to the policy is straightforward and involves no extra expense.
I also sought the perspective of Dallas Attorney Lora Davis with Davis Stephenson, PLLC, who is also the chair-elect of the State Bar of Texas Real Estate, Probate, & Trust Law Section. She emphasized the following:
“The owner of the property is the only one who has an insurable interest in the property.”
“That is why it is important that the owner be listed on the…insurance policy.”
Davis provided a more detailed explanation:
“A transfer of both real and personal property to a revocable trust is common in estate planning. After the transfer, the trustee of the revocable trust is the new owner of that property. Generally, the owner of the property is the only one who has an insurable interest in the property. That is why it is important that the owner be listed on the property and casualty insurance policy. Most, if not all, insurers will add the trustee of the trust to the policy as an additional insured without charge. The caveat to their advice below is that the trustee of a trust holds legal title to the property; the trust itself does not hold legal title. Because there is often confusion about that distinction, in 2023 the Texas legislature passed a new provision to provide that, in most cases, any instrument that names a trust as a party will be treated as if it named the trustee of the trust as a party (see Texas Property Code Section 114.087). While that will now be the case in Texas, it may not be the case in other states. Thus, it is advisable to ask the insurer to add the trustee of the trust as the additional insured. Because a revocable trust is normally established by an individual (i.e., as the settlor) to benefit the same individual (i.e., as the beneficiary), many insurers allow for the policy to remain in the individual’s name. However, this is usually not the case for irrevocable trusts. Irrevocable trusts used for estate planning purposes generally have different settlors and beneficiaries. Thus, a new policy, rather than the addition of an additional insured, is often required when property is transferred to an irrevocable trust. In addition to the property and casualty insurance issue, it is also important to consider title policy and homestead exemption issues when transferring real property to a trust. There are ways to ensure that the title policy will continue for the benefit of the trustee and the homestead exemption will be available for the beneficiary after the transfer. There are many factors that need to be considered to determine if the trustee will be included in the definition of ‘insured’ under the title policy. There are specific provisions that need to be included in a trust, whether revocable or irrevocable, to permit the property to continue to qualify for the homestead exemption in Texas. For all of the above reasons, it is important that a qualified attorney is consulted before transferring real property to a trust.”
Steps to Take
To ensure proper insurance coverage, United Policyholders suggests these crucial steps:
- Contact your insurance agent/broker or insurer immediately after transferring property into a trust.
- Request that the trust be added as an “additional insured” on all property insurance policies, including landlord policies, earthquake, and flood hurricane policies.
- Ensure the trust’s name is listed exactly as it appears on your trust documents.
- Obtain written confirmation of this change from your insurance company and agent/broker.
Disclaimer
This information is for informational purposes only and should not be considered legal advice. Always consult with a qualified attorney for personalized guidance regarding your specific situation.
