Property and Title Insurance - You must Consider in your Estate Planning

It is important to add your trust to your homeowner’s and other property and casualty insurance policies so that there is no lapse in coverage. We have encouraged clients to do so on their own and many insurance agents prompt clients in an annual questionnaire that asks about transfers of title. But, after a recent court case where coverage was denied, we have decided to become more deliberate in making sure that clients update their property insurance at the right time.

As far as title insurance goes, policies issued in 2006 and after (when the standard, “ALTA” policy was revised) extend coverage to trusts for estate planning purposes. Older policies not so. Plus, some transfers may cause coverage to stop in any event.

Continue reading what you should consider doing in the case of a life estate, a revocable trust, an irrevocable trust, an estate after a death, and a transfer to an LLC or other business entity.

Revocable Trusts. Add your revocable trust as a named insured.

In a house fire case from 1992, the Massachusetts Appeals Court held that a couple who transferred their home to a revocable trust were covered when it was later destroyed by fire (Queen v. Vermont Mutual). That said, you should add the revocable trust to your property and casualty (P&C) policy anyway. Your trust becomes irrevocable after you die and you want to be sure that your beneficiaries are going to be covered. Most clients are trustees of their revocable trusts, but if anyone else (like your child) has currently taken office as a trustee, ask the insurance company to add him or her as well.

Irrevocable Trusts. Add the trustees and the irrevocable trust as named insureds.

If you have an irrevocable trust that now owns your property, the trust should be named as an insured on your P&C policy. Unless the trustees are members of your household, they may not have coverage for liability, so they should be named. Adding the trust should be routine, but the insurance company does not have to extend insurance to anyone not in your household and the company may do a credit check. Hopefully your trustees have good credit.

Estates. Following the death of the current owner in cases where the real estate passes to the client's estate at death, the estate of the insured will generally be covered under policies of property and casualty, and title insurance. Notice should be given to the P&C insurance company because they will want to know that the house is occupied or there are arrangements for security if it isn’t. Failure to do so can mean no coverage.

Once the estate is settled, it will important to get the P&C insurance coverage on the property lined up for the new owners of the property, be it a trust or the heirs, if the property is to stay in the family.

Life Estates. When you have a "life estate" in your property, add the trust and trustees, or individuals, i.e. the “remaindermen” who follow you to the policy, now, as named insureds.

Coverage for the remaindermen was the subject of a 2018 judgment in the state of Maine. The new owners (the children) were denied coverage by the P&C insurer when the house burned down after the death of their mother, who had a life estate and was the only insured on the policy. (Frye v. MMG Ins.) The same result could occur if the title goes to a trust following the life estate.

Business entities. Property and casualty policies should be changed to insure the entity you have deeded to. If you personally occupy the property then you should personally be insured as well, so be sure to ask for that coverage or obtain a separate tenant’s policy.

Owner’s Title Insurance:

This policy insures that you have clear title and, if you obtained it at all, is paid in full when you purchase property. You may need an endorsement for your title insurance.

This area of coverage is harder to address than P&C coverage because the insurance policies can be vague or have changed, and because owners often do not know if they have owner’s title insurance (not to be confused with lender’s coverage which has been virtually mandatory since the 1980s. (Here is a link to suggestions for searching out whether you have a policy.) This is what we suggest at this point:

• On any owner’s title insurance policy issued before 2006, you should ask the insurance company for an endorsement naming the owners you have added. Such policies are vague on whether the trust is an insured and should not be relied on to insure trusts.
• If you have an owner’s policy from 2006 or after, then the transfer to a trust for estate planning purposes should still leave you with coverage because such transfers are anticipated in these policies.
• If your transfer is not to a trust for estate planning then you will very likely have no title insurance coverage and you would do well to seek the rider for a new Named Insured or a new policy no matter when the policy was written. Transfers to children directly and to a trust created by children are examples of transfers not to trusts for your estate planning purposes.
• If you have signed a deed to a revocable trust but it is held in escrow for future recording, you have avoided the need for property and title insurance updates for the moment. Once recorded, the update must be made.

It turns out the topic of insurance coverage is not discussed often enough. If the topic has not been raised by your insurance advisors, agents, lawyers or others in connection with your estate, now may be the time to bring it up. Decide how you will proceed. You and your heirs may be glad you did.