Advisor One shared a useful story this week that touches on an item commonly forgotten in wealth transfers, including those using trusts or other legal tools. It is critical to remember how insurance coverage might be affected by the transfer. That way, changes can be made immediately to guarantee that coverage is in good standing at all times. Sadly, as you might expect, this error is often only uncovered after some catastrophic accident, when insurance coverage is needed. The last thing anyone wants is that “oops” moment, when it is discovered that the coverage does not exist because of the previous transfer via trust or other tool (like an LLC).
The Basic Problem
Insurance policies are written to provide coverage to an owner or titleholder. This is the case for virtually all types of coverage, from home, automobile, and boats to collectibles. Problems arise, however, when a transfer is made and the insurance policy is not updated to reflect the change. For example, if a home is transferred into a trust, it is important to confirm that the proper changes are made so that the homeowners policy covers the new arrangement.
While this may seem like an obvious step that must be handled as part of these transfers, it is all too often forgotten. The article argues that the mistake is more likely to be made in situations where ownership changes but the actual possession of the property remains with the former owner. For example, if a senior transfers title of a house to a trust for tax and planning purposes, the senior is likely to still live in the house. In those cases it is critical to ensure that the insurance covers both the actual owner and the “occupant.” The same general idea also applies vehicles and other valuable items.
The specific protocol to ensure proper coverage may depend slightly on the item and the insurance company. In most cases, it is just a quick fix. But, the consequences of failing to making that quick fix before a possible accident are staggering. It goes without saying that it is beneficial to have a decent relationship with your broker such that you can make a quick call after these transfers to get specific information about what needs to be done in your exact case to guarantee that these insurance details are account for.
The bottom line: keep insurance issues in mind when all of these transfers and be sure to bring it up if it seems to be a forgotten detail.