Putting property in a realty trust is often a prudent move. A realty trust gives you a separate entity for the purposes of collecting rents, paying expenses and distributing income to trustees. For legal and tax reasons, not to mention risk and succession objectives, the realty trust can make a lot of sense.
But don’t overlook the insurance implications of a realty trust!
Take, for example, this scenario: two parents – a mother and father – who have a piece of land with a 3-family house on it. It brings in good rental income, and they want to pass it down to their kids. What happens all too frequently, based on our experience, is the property being placed in a realty trust – but the insurance NOT being updated.
This problem is like a ticking time bomb. Why? The trustees think everything is all set from a legal standpoint now that the property is in the trust. But they neglected to contact their insurance agent and advise of the change in ownership etc. This can result in the insurance agent insuring the property improperly. Since the property ownership changed, the Named Insured on the policy might have had to change as well. That’s another layer of complexity that can make the claims process even more difficult. And, in the worst-case scenario, the carrier may not pay the claim.
The insurance company most likely won’t get away with the denial easily. As we learned from Frank A. Queen v. Vermont Mutual: “title is not the touchstone of insurable interest”. But why start off an already stressful process on the wrong foot?
The key takeaway here is: if you go through the effort to set up a realty trust, make sure you then insure the property correctly by naming the trust as the insured. Talk to your insurance agent. Make sure you’re giving them the information they need so they can make sure to provide you the coverage that you need.
