Private Client Services Update – Transfer of Residence to Living Trusts: Insurance Issues
By Gregory R. Davis, Estate, Trust & Wealth Transfer
Living trusts have become so popular that financial advisors, bankers, insurance agents and lawyers are accustomed to seeing their clients convey residences to living trusts. There are insurance pitfalls associated with conveying one’s residence to a living trust which advisors should be prepared to identify.
Transferring a residence to a living trust is simple. Virginia law provides a recording tax exemption for the deed accomplishing the transfer. Tax laws make the common living trust transparent so that mortgage interest deductions and capital gains tax exemptions associated with primary residences are not affected by conveying a residence to a living trust. Previous articles circulated by the Kaufman & Canoles P.C. Private Client Services Group have detailed the Virginia statute which preserves the creditor protection advantages of tenants by the entirety ownership when a married couple transfers their primary residence to their living trusts. Finally, Federal law provides that transfer of a primary residence to the most commonly structured living trust cannot trigger the “due on transfer” clause contained in home mortgage documents.
The simple transfer of a residence to a trust has significant impacts, however, on homeowners and title insurance coverage which are not addressed by Virginia law.
In the case of homeowners insurance, the transfer of a residence to a living trust means that the real estate is then owned by a separate legal entity, not the individuals who originally applied for the hazard and liability coverages contained in the homeowners insurance policy. Although the property and casualty agents we work with regularly have not seen claims where coverage for a fire, storm or home accident is denied because the homeowner is a living trust while the insured is the person who created the trust, that possibility exists. Thus the best advice is that clients notify their homeowners insurance agent when a property is conveyed to a living trust. The insurance industry has promulgated a specific Trust Endorsement which expands coverages to the trust, trustees and the individual residents of a residence. Naming the trust and the individual clients as insureds in the policy is another structure which should be explored.
On a related note, umbrella liability insurance policies too should be endorsed to reflect transfer of a residence to living trusts.
Title insurance provides another coverage issue when residences are conveyed to living trusts. As with homeowners insurance, the problem lies within a title insurance policy’s definition of the insured party. Living trusts and their creators are separate legal entities. Title insurance companies active in Virginia use policy terms which are fairly similar, and the most recent policies used in the industry solve any living trust coverage concerns by stating clearly that the term “insured” includes the person who purchased the policy and trusts (like living trusts) created for the benefit of the policyholder. Older Virginia title insurance policies and policies written in other states may not extend coverage to living trusts, and thus all polices should be reviewed by a lawyer and endorsed as needed after transfer of a residence to a living trust. Our experience is that the endorsement process is easy and inexpensive, but it is important to maintaining title insurance coverage.
Advisors to people with living trust-based estate plans can prove their worth in spotting these little known, but important insurance issues. Members of the Private Client Services Group are eager to consult on the details of assuring that key insurance coverages are not inadvertently affected by living trusts. – Greg Davis
The contents of this publication are intended for general information only and should not be construed as legal advice or a legal opinion on specific facts and circumstances. Copyright 2023.