The title of this article is Why a Trust of LLC Endorsement is Needed on Your Homeowner’s Insurance. If you have a Trust or an LLC, it’s likely that you know what these words mean. But, for the sake of those who want to learn more about this possibility, let’s define these terms. A Trust is a fiduciary arrangement that lets a third party, or trustees, hold assets on behalf of a beneficiary or beneficiaries. An LLC, also known as a Limited Liability company, is a business structure that does what the name implies; it limits liability of the owners.
How is This Tied into Homeowner’s Insurance?
These seem like topics that are unrelated or would take a big leap to be connected. On the contrary, the relationship is a little complex but absolutely tied together. A real estate property or in the case of this article, a residential home, can be put under the ownership of a Trust or an LLC.
Why Put Your Home in a Trust or LLC?
People choose to put their homes in a Trust or LLC for a few different reasons.
Putting a House in a Trust:
- Avoid the complicated process in probate court
- Save on estate taxes
- Protecting the house from creditor attacks
Putting Your Home in an LLC
- Avoidance of taxation
- Personal Asset Protection
- Quick Settlement of Estate
- Reduce Estate Taxes
If you have not yet put your home in an LLC, do some more research and talk to a licensed professional who specializes in real estate. Consider what Hallock & Hallock Attorneys at Law have to say about putting a house in an LLC.
Getting your House Properly insured When It’s in a Trust or LLC
If you already have your house in a Trust or LLC, you’ll need protection beyond what your standard Homeowner’s Insurance probably offers. Proper structuring of the insurance policy can help you avoid disastrous gaps in coverage that will result in a whole mess of problems in the event of a liability claim or property claim.
Consider these scenarios:
Scenario 1: A family owns a 10 acre lot and has it divided into 3 lots. 2 are family owned and one is owned by their LLC and is rented out. The 10 acre lot is insured under a homeowner’s policy, however the LLC isn’t listed as a named insured and only the family members were listed. A gardener was hired by a family member and somehow fell and broke his arm on the LLC owned property. He then sues the family and the LLC. The family and their assets are covered under their homeowner’s policy, however the LLC was not protected under this policy. The family now has to pay out of pocket to hire defense lawyers for the LLC because the insurance carrier will not pay for the LLC with ownership interest.
Scenario 2: A couple, William and Thuy, have a $3 million home and have been advised by their attorney to move their $2 million worth of valuable assets and their house into a Trust in their name. They can still live in the house, but all property inside the house and the dwelling itself is now deeded to the Trust. William’s brother, Marshall, is named as the Trustee. Nothing was changed on their homeowner’s insurance policy, leaving the insured listed as William and Thuy.
Sometime after this transfer of ownership happens, the clothes dryer caught fire and the house burned down. The couple make a claim with their homeowner’s insurance carrier. The adjuster is ready to handover the check for $5 million check, but he needs to see a copy of the title of the house first. As soon as he sees that the title is in the name or Marshall as the trustee of the Trust, he rips up the check. The homeowner’s insurance policy only lists the insured as William and Thuy, Marshall was not on this list. All of their assets and the house had been completely uninsured with the transfer of ownership to the Trust. In this unfortunate scenario, the only compensation that their home insurance will probably cover is the additional expense to rent another full-furnished dwelling.
The moral of these stories is to make sure that your homeowner’s insurance policy is structured correctly if you have your house in a Trust or LLC. The way to do this is to get a Trust Endorsement or LLC Endorsement added onto your Homeowner’s policy, making sure that the Trust and LLC is a listed as an insured entity.
Getting an Endorsement for Your Homeowner’s Insurance Policy
Homeowner’s insurance was created to recognize individuals to be insured, not an entity like LLCs or Trusts. In the homeowner’s insurance policy jacket, “the insured” refers to these individuals – real people, not businesses or organizations.
The Trust Endorsement is called a “Residence Held in Trust” Endorsement (HO 05 43). Having this endorsement will name the Trustee and Trust as the named insured. The owners who still reside in the home are shown in the Schedule section at the top of the Residence Held in Trust form. Other members of the household are usually included as well.
Who is going to be Protected under the Trust Endorsement?
- Members of household
There are additional qualifications for coverage and need to be considered on an individual basis. If you’re looking to get a Residence Held in Trust Endorsement, talk to an AIS agent to learn more about the coverage tailored to your specific situation.
If you put your house under LLC ownership, you may find it difficult to find an insurance company that is willing to cover the residential house when it is deeded through an LLC. The reason is that it would now be considered under a business policy. Homeowner’s insurance covers individuals; business insurance covers entities that actually engage in business activities.
This home under the LLC does not meet either of these qualifications. An LLC Endorsement added on to your Homeowner’s Insurance policy will allow for entities like these to be recognized under “Named insured”. With an LLC or Trust Endorsement, “the insured” recognizes the entity and LLC members (owners). It protects both the LLC and its members.
The LLC Endorsement covers:
A) The dwelling,
B) Other structures located on the property
C) Medical payments to others
A) The LLC is the single owner of the dwelling and it will be used exclusively for private residential purposes
B) There is no business activity conducted on its premises, other than occasionally renting out the dwelling
C) The LLC is owned by managers and members who are actual people, not other entities
D) The LLC was created purely for estate planning or as a tax shelter
Who is Going to be Covered Under the LLC Endorsement?
- LLC Member or Partner of a Limited Partnership
- Occupants of the residence
As with the Trust Endorsement, LLC Endorsement is also considered on an individual basis. To see what you would be covered for, you’ll need to talk to an AIS agent to discuss your scenario.
Get More Information with an AIS Homeowner’s Insurance Agent
If this sounds like what you need for protecting your residence owned by an LLC or Trust, contact AIS for more information. Don’t be like the couple in the scenario above. Make sure that you are covered in the event that a liability or property claim needs to be made. Getting an Endorsement is the way to go if you have chosen this route of putting your house in a Trust or LLC.
The information in this article was obtained from various sources. This content is offered for educational purposes only and does not represent contractual agreements, nor is it intended to replace manuals or instructions provided by the manufacturer or the advice of a qualified professional. The definitions, terms and coverage in a given policy may be different than those suggested here and such policy will be governed by the language contained therein. No warranty or appropriateness for a specific purpose is expressed or implied.