When creating an estate plan with a Living Trust, a house is typically one of the main assets the Trust will hold. Placing your house in a Trust requires signing a new deed from the current individual owner(s) to the Living Trust. But signing and recording the deed is not the end. There is additional work so that the house remains legally protected against loss.
Many homeowners overlook a vital follow-up task: updating the homeowner’s insurance policy to reflect the change in ownership. Failing to make this adjustment can lead to significant problems down the road.
Let’s discuss the steps to fund your Trust with real estate, and the importance of making updates to homeowner’s insurance.
Why is an Update Required When Placing a House into a Trust?
Living Trusts frequently hold real estate, whether it’s a primary residence or a rental property. Let’s say our client, Joe Smith, owns primary residence. It’s titled solely in his name right now.
He then works with his attorney to set up a comprehensive estate plan that includes a Living Trust. When he executed the Trust agreement, he also signed a new deed placing his house into the Trust.
The new deed as recorded may read one of two ways:
- Joe Smith Living Trust, or
- Joe Smith as Trustee for the Joe Smith Living Trust
Either way, the form of ownership has changed. Instead of individual ownership, this is now Trust ownership.
Because of this new ownership structure, insurance companies want to verify that there is no discrepancy between the insured person/people and the owner of record. This is where you need to take action.
Contact Your Insurance Agent Promptly to Make the Update
After signing the Trust paperwork and the new deed, the next thing you should do is contact your homeowner’s insurance agent. Let them know that your home is now owned by a Trust and that you need to update your policy.
In most cases, the insurance company will add the Trust as an additional insured. This step ensures that the Trust, as the new legal owner of the property, is protected by the insurance policy in addition to you individually. This generally will not affect your premiums as long as the nature of the home’s use has not changed.
Each insurance carrier may have specific requirements for making this change. Follow your carrier’s instructions carefully and without delay.
Consequences of Failing to Update After Placing Your House in a Trust
When you place your house into a Living Trust, the Trust becomes the legal owner of the property. If your insurance policy still lists you as the owner, there will be a discrepancy between title records and who the policy covers. This could lead the insurance company to deny an otherwise valid claim.
For example, if your home suffers damage due to a fire, the insurance company may deny a claim because the named insured (you) no longer matches the property owner (the Trust). This could leave you without coverage and responsible for the full cost of repairs.
Beyond a possible claim denial, an outdated policy can also create confusion and delays in trust administration.
The purpose of establishing a Living Trust is to simplify the transfer of assets and reduce the likelihood of disputes. But failing to align the insurance policy with the Trust’s ownership can undermine these goals.
Will the Lender Take Any Actions After Placing the House into a Trust?
If you still have a mortgage on your house (or more precisely, a note secured by a deed of trust), you may wonder if there is any risk of the lender taking adverse actions.
Federal law prohibits the lender from accelerating the balance on your mortgage if you place the house into a Living Trust. As long as you are an occupant of the house, you can still keep making payments just as you previously have been. You can read more about this topic here.
Final Comments on Homeowner’s Insurance and Having Your House in a Trust
Take the time to update your homeowner’s insurance policy after placing your home in a Living Trust. It’s a simple yet vital step in safeguarding your assets.
By ensuring that the Trust is properly listed as an insured on the policy, you can avoid claim denials due to administrative oversights that are easily avoidable.
Connell Law, PLLC guides our clients through the process of retitling assets to their Living Trust, as well as the steps needed after signing estate planning documents. Reach out to us today to request a free consultation.
