It’s not unusual for homeowners to place their home into a trust for various estate planning purposes. According to CNN Money, this is an estate-planning option for even average homeowners and not necessarily only the very wealthy. However, placing the home into a trust may cause some issues when it comes to your home insurance policy. If you find yourself with a house in a trust, you’ll need to sort through the legalities to understand exactly how this should be reflected on your policy. It’s generally something that can be accommodated by most insurance companies, but it’s not going to happen automatically.
First and foremost, you need to make sure that your insurance policy references the name of the trust as an insured. If your home is now owned by the “John Doe Trust,” it should also be named on the insurance policy. Unfortunately, too many homeowners do not take this basic step when they first set up their trust and transfer title of the home. Some assume that nothing has changed from an insurance standpoint or perhaps because they are still the trustee, the policy will reimburse them in the event of a loss. However, in the event of a loss, the home insurance policy will not pay anyone who is not named on the policy. For example, if your home is now in the name of the trust and you are not the trustee, your policy would only pay you for your personal property that you still own in your name. The value of the home cannot be paid to anyone who is not a named insured on the policy.
To avoid these problems, you must discuss the ownership structure of your home with your insurance company to ensure that all parties’ interests are properly accounted for within your policy. In many situations, homeowners have not only transferred their home into a trust, but they have also actually become tenants in what was previously their home. These trusts are known as qualified personal residence trusts and have a little more complexity than the standard living trust, where you remain the trustee and have complete control over the property in the trust. With a qualified personal residence trust, you are granted the right to continue living in the home, but the ownership structure is somewhat different and that will have insurance implications.
In most situations, you will need to consult with both your trust attorney as well as the insurance company. Since trusts are becoming more common for homeowners, insurance companies have started responding to the need to clarify how the home is insured. Sometimes it can be as simple as adding an endorsement to the policy that names the trust and/or trustee as insureds. In doing so, the interests of all the parties to the home will be effectively covered by the policy. If your insurance company is unwilling to add an endorsement or the additional parties, you may need to find a new insurance company that is familiar with such arrangements.
By taking the steps to place your home in a trust, you have engaged in an astute estate planning process. Don’t undermine that progress by not properly insuring the house whose value you have sought to protect through the trust.