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May 3, 2015

Insuring property held by a trust or LLC

More than ever before, families and individuals are creating trusts and limited liability companies and transferring legal ownership of one or more of their properties to these entities. These arrangements are often an important component of a family’s overall financial and wealth management strategy. But without an insurance program that properly reflects the structure of these arrangements, they can create unintended risk exposures.

Trusts, LLCs, and wealth management

There are several benefits for families and individuals who choose to transfer ownership of personal assets and property — including homes, investment real estate, and fine art — to a trust or LLC rather than maintaining ownership of assets in their own names. This arrangement creates indirect ownership and can allow for reduced liability exposure, a smaller tax burden, a simplified probate process, and easier transfer of assets between individuals and between generations.

Coverage considerations

Individuals and families that create structured wealth management plans employing trusts, LLCs, or both, usually do so for the primary goal of asset protection. That’s why it’s critical for them to have personal insurance programs that are carefully structured to support that goal and that will effectively protect them in the event of a property or liability loss.

Though ownership of property by an alternate entity creates benefits, indirect ownership also introduces a level of complexity that must be addressed in the insurance policies covering the property. For example, when a trust or LLC legally owns a home, the ownership entity should be included on the policy. If it does not, coverage could be denied in the event of a loss, putting the assets of the trust or LLC at risk.

Liability coverage issues can introduce even more complexity to the picture. Ultimately, the best approach for insuring property held by a trust or LLC is to consult with one’s attorney, financial advisor, and expert insurance advisor.

Laddered ownership

Ownership of property may be held indirectly by layers of trusts and/or LLCs above the specific entity that holds title to the property. This is the case when a property is owned by a trust or LLC that is in turn owned or held by another trust or LLC — and so on. This “laddering” of ownership can transmit risk up through each entity until it reaches the individual or family members who stand at the top of the ownership “ladder.”

Questions we consider

Appropriately insuring property and other personal assets held by a trust or LLC can depend on subtle intricacies of the ownership structure. To begin an analysis of your situation, a MMA PCS Personal Risk Advisor may ask:

  • What is the ultimate purpose of the trust or LLC?
  • Who are the parties to the trust or the LLC?
  • What property and/or other insurable assets does the trust or LLC own?
  • Does the trust or LLC generate revenues, and how?
  • Are there employees of the trust or LLC, what are their duties, and how are they paid?

To learn more about insuring property and other personal assets held by a trust or LLC, contact a MMA PCS Personal Risk Advisor.

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