Wealth management strategies often include trusts and limited liability companies, or LLCs. Homes, automobiles, boats and other assets are placed into trusts and LLCs for a multitude of reasons. Creating a trust or LLC adds a layer of protection between the entity and personal assets. In the event of legal action, the entity can help shield personal assets.
Did You Know Entities Need Protection Too?
Although creating an entity initially produces a layer of asset protection from legal action, additional guidance is necessary to keep that layer of protection secure. Issues arise when assets are placed into a trust or LLC and individuals are not given guidance on the next steps needed to properly protect the entity.
In the same way that people need insurance to minimize out-of-pocket costs from risk exposures and to provide coverage in the event of a claim, the same is true for any asset in the name of a trust or LLC. Various insurance policies are available depending on the asset at risk and the intent behind the LLC or trust.
Named Insured vs. Additional Insured
When ownership of a home is transferred to an entity, it creates a layer of protection for the family that created the entity in the event of a claim or legal action. Maintaining separation between personal assets and the entity is crucial. One area that is often overlooked is insurance. How a trust or LLC is listed on a homeowner’s policy can significantly impact coverage.1
If the entity is listed as the named insured or policyholder, there is strong protection for the family in the event of an accident or a lawsuit. Anyone living in the home (even if it’s the original family) will need to secure renter’s insurance to cover belongings and liability.
In comparison, if the entity is instead listed as an additional insured or additional interest on the homeowner’s policy, then the family that created the entity would be the named insured. This may seem innocuous; however, the additional layer of protection has been removed in this situation. If, for example, a guest falls down the stairs, the guest could file a lawsuit, naming both the entity and the family as defendants. The layer of protection that was initially created is gone, and the family’s assets may be at risk.
Co-mingling of Assets Has Ramifications
State law treats both trusts and LLCs as legal entities. It is therefore imperative that a family’s finances and the entity’s finances remain separate.2
There can be no co-mingling of funds, warns estate planning partner Lauren Wolven of Levenfeld Pearlstein, LLC, in Chicago, who was quoted in Chubb’s guide, “When Trusts and LLCs Hold Assets: The Hidden Risks.” Once funds are co-mingled, the additional layer of protection is gone.
“Insurance premium payments are one of the areas where clients often think it is harmless to pay the premium directly, even if there is a trust or entity involved,” Wolven notes. “If there is a lease agreement in place for use of the home or vehicle, direct payments may be proper. Otherwise, paying directly — instead of having the entity-owner make the payments — could create a bad fact to help someone punch through the protections of the LLC.”
Commercial Enterprises Also Need Protection
LLCs and S corporations limit the business owner’s and shareholders' liability; however, the business still faces risks from normal operations. Entities created for a commercial enterprise (income generation) need commercial coverage. Not all insurers are equally equipped to deal with such exposure. Having a broker assist in finding carriers capable of providing sufficient coverage is crucial.
A lawsuit can be filed against a trustee for almost anything, even if no mistakes were made. Lawsuits bring legal fees, reputation damage and additional stress. Fortunately, trustees have insurance options available to protect their personal assets.
A Trustee Error and Omission (E&O) insurance policy helps protect a trustee from a lawsuit related to their professional handling and management of a trust. Without this coverage, a trustee may have to pay out-of-pocket legal costs — and potential damages — in the event of a lawsuit.3
The policy applies to suits alleging:
Co-mingling of trust money
Mismanagement of trust assets or poor investment decisions
Beneficiaries who believe they did not receive their fair share of the assets
Conflict of interest if the trustee is also a beneficiary
Negligent selection of outside professionals hired by the trustee to assist in administering the trust
Negligence for not hiring outside professionals to administer the trust
Negligence for not following terms in the trust
Families may include LLCs or trusts as part of an investment strategy. These entities also need protection. Investment theft insurance is available for families to recoup funds in the event of financial theft. This coverage allows these funds to be refunded to the trust or LLC without the expense of legal costs and lengthy time delays.
Homes placed in an entity may employ domestic staff to maintain the residence. If an entity employs domestic staff, employment practices liability insurance (EPLI) should be considered.4 This type of policy provides families and entities coverage from lawsuits filed by employees and helps protect against:
Discrimination (based on sex, race, age or disability, for example)
Other employment-related issues, such as failure to promote
Another option to consider if staff is employed is workers’ compensation insurance, which provides benefits to entity employees who are injured or become ill on the job. Further, it may be required based on state law. Check your state law to confirm compliance.5
How USI Can Help
USI is here to help navigate the complex world of insuring trusts, LLCs and S corporations. Our dedicated personal risk team networks nationally to build integrated, client-centered solutions. To receive a comprehensive personalized risk management plan or discuss how we can help you, please contact us at firstname.lastname@example.org.
Sources: 1 Nationwide Private Client: Trusts and LLCs 2 Chubb – When Trusts and LLCs Hold Assets: The Hidden Risks 3 The Hartford – Professional Liability (E&O) for Trustees 4 Nationwide – Employment Practices Liability Insurance 5 Insureon – Why skimping on LLC insurance can be a costly mistake