Trusts and LLCs are frequently chosen to hold property, operating entities and other assets for several reasons, all usually dictated by an individual’s or family’s structured wealth management plan. By transferring homes, real estate investments, family business interest, fine art and other assets to a trust or LLC, personal liability exposure can be reduced, asset protection and tax efficiency increased. Additionally, the transfer of the assets to future generations can be simplified by avoiding probate with documented trust beneficiaries or LLC interest holders.
While generating numerous benefits, problems can arise when assets are indirectly owned and titled accordingly. By working with Howard Insurance to institute a risk management program to support and reinforce the goals of a trust or LLC, adequate protection can be provided in the event of a loss.
Who Is the Counterparty?
When it comes to risk management, indirect ownership of assets via a trust or LLC comes with challenges. For instance, it is critical for insurance policies covering these assets to list the appropriate entity as the owner. Failure to do so could result in a claim being denied, putting the assets at risk.
Additional complexity can arise when there is laddered ownership of assets. It is common for a trust to own an LLC which, in turn, may own one of more additional LLCs. The trust could be owned by another trust raising questions as to which entity should be listed as the owner on a policy. The general rule is that the trust or LLC that directly owns the assets should be recorded as the owner, but what about when more than one LLC owns an asset such as a business? In any indirect ownership situation, a Howard Insurance professional risk management expert will consult with a client’s attorney or other financial advisors in determining how to proceed.
Next, even though insurance policies may be properly matched to corresponding assets, challenges can arise when premiums are paid or when claim payments are received. “Many clients think nothing of directly paying the premium for indirectly owned assets,” says Lisa Gelles, Executive Director, Private Risk, at Howard Insurance. “This can create a dangerous fact pattern that can help a creditor pierce the veil of protection provided by a trust or LLC. The same result can come from the wrong individual or entity cashing a claim check.”
Generally, insurance on property held in a trust or LLC can be structured one of two ways: the trust or LLC could be either the “named insured” on the policy or it can be the “additional insured” or the “additional interest” on the policy of the individual who put the assets in the entity. Making the trust or LLC the named insured on the policy creates more legal separation between the entity and the underlying beneficial owners (UBOs). If the entity pays the insurance premiums, this helps to maintain that separation.
Conversely, if the trust or LLC is the additional insured or additional interest on the policy with the UBO(s) as the named insured, the legal separation is not as secure. This could significantly weaken the asset protection attribute of the entity and expose the UBOs to personal liability.
Managing Additional Liabilities
Gelles says there may be a need for additional insurance in some situations. “By transferring assets to a trust or LLC, additional insurance may be needed to mitigate liabilities entity ownership can create. For instance, if a client’s automobiles are owned by a trust or LLC and leased to the client, the client may need to buy separate car insurance. Similarly, if an entity has employees to manage property or to operate a company, proper coverage will be needed for employee liability exposures.”
If the trust or LLC holds a home or other property that is used for a commercial enterprise, commercial coverage is needed. This could be a farm, ranch or vineyard.
Many traditional insurance brokers are unfamiliar with these intricacies. Howard Insurance has extensive experience in insuring entity-owned assets and offers sophisticated options to make sure there are no gaps in coverage.
Trustee Liability: No Good Deed Goes Unpunished
Many people are asked by family and friends to serve as the trustee for a trust established to hold property for asset protection and/or estate planning purposes and feel honored to be asked. A trustee’s job entails safeguarding a trust’s assets for the benefit of the beneficiaries while carrying out the wishes of the trust’s grantor for how the assets are managed and used.
Unfortunately, the “good deed” of serving as a professional trustee comes with a potential downside that creates considerable personal liability for the trustee. Howard Insurance helps trustees protect themselves in instances where grantors and beneficiaries accuse a trustee of asset mismanagement, accounting errors, unfair or improper distributions, failure to follow the terms of the trust agreement or a perceived conflict of interest.
A Miscellaneous Professional Liability for Trustees insurance policy can cover a trustee for not only actions brought by a trust’s grantor and beneficiaries but also from suits brought by trust creditors, charities or government agencies acting on behalf of beneficiaries. Trustees are treated differently than employees of professional service organizations who typically escape personal liability since the organization protects them. This is not the case with professional trustees who personally face actions for breach of trust. Carrying a liability policy to protect oneself becomes paramount for every trustee.
Howard Insurance tailors each Trustee Professional Liability Policy to the unique exposures of trustees responsible for a variety of trusts, including:
· Living trusts (where the grantor is not the trustee)
· Liquidating trusts
· Claims/insurance trusts
· Testamentary trust
· Bankruptcy trusts
Trustee Professional Liability Policy Coverages
Disagreements between trustees and other parties to the trust arrangement are common. Most are financial in nature with grantors objecting to investment management strategies or remainder beneficiaries objecting to principal distributions made to an income beneficiary. The scenarios that can result in personal liability for a trustee are seemingly endless, so it is important to understand what a Trustee Professional Liability Policy covers. Here are common policy features:
· Trustee is the Named Insured
· No requirement that a trustee’s services are performed for a fee
· Final adjudication and non-imputation of the conduct exclusions
· Coverage for trustees’ employees in their provision of services for the trust
· Definition of Professional Services address the exposures unique to trustees
· Vicarious liability coverage for the selection of “outside professional services providers”
Professional Help Is Here
The Private Risk Team at Howard Insurance can help design coverage solutions that protect a trustee from personal liability in the execution of their duties. For over 75 years, Howard Insurance has helped each of our select clients secure their assets, their ambitions, their businesses and, ultimately, their legacies. Leaders in private insurance advisory and risk management, we pair deep expertise with sincere attention to our clients’ needs to create unique solutions that benefit them best.