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.
