Do You Need Umbrella Insurance If You Have a Trust? Covering Liability Risks

Many people utilize trusts as part of their estate planning to protect and distribute assets. While trusts provide legal protections, you may be wondering if you need umbrella insurance when assets are held in a trust. This article examines why umbrella coverage is critical if you have a trust, what risks trusts face, and how to ensure full liability protection.

Overview of Umbrella Insurance

• Umbrella insurance provides extra liability coverage above existing policies like auto and homeowners.

• It kicks in when those primary policy limits are exceeded after a loss.

• Umbrella policies provide $1 million to $5 million or more in additional coverage.

• Coverage includes legal defense costs for covered claims.

• Relatively inexpensive way to protect assets from lawsuits.

• Especially important for high net worth individuals with substantial assets at risk.

Why Umbrella Coverage Matters for Trusts

There are a few key reasons umbrella insurance is crucial if you utilize an irrevocable trust, revocable trust, or other trust types:

• Exposure beyond primary policies – Trusts can hold significant assets that may not be fully covered by basic policies if large claims arise. Umbrella protection fills this gap.

• Lawsuits naming trust – Legal actions can specifically name the trust as defendant, putting its assets at risk.

• Professional liability – Claims against professional trustees hired to manage the trust may not be covered without umbrella insurance.

• High net worth risks – Wealthy individuals using trusts face greater litigation risks that warrant extra coverage.

• Trust ownership – Assets like real estate may be owned by trust, requiring ownership-specific insurance.

What Liability Risks Do Trusts Face?

There are a variety of common liability exposures that can threaten assets held within a trust:

Premises Liability

• Injuries to visitors on property owned by the trust.

• Example: Guest falls and is injured at a vacation home titled to the trust.

Products Liability

• Injuries or damage caused by products made or sold by a trust-owned business.

• Example: Customer alleges a defective product sold by a company owned by the trust caused harm.

Professional Liability

• Claims against hired trustees or advisors for negligent advice or mismanagement.

• Example: Trustee makes poor investment decisions that diminish trust assets.

Libel, Slander, Defamation

• Lawsuits alleging reputational damage from defamatory statements made by the trust or trustee.

• Example: False statements by a trustee injure the reputation of a third party who sues.

Breach of Contract

• Claims alleging the trust failed to uphold a contract with vendors, clients, or others.

• Example: A supplier sues the trust for not paying for services rendered as agreed.

Umbrella Insurance & Trusts: What You Need to Know

When obtaining umbrella insurance for a trust, there are important considerations:

• Name the trust – The trust needs to be listed as an insured party.

• Cover trustees – Individual trustees should be named insureds.

• Review exclusions – Watch for exclusions affecting trusts or professional services that may limit coverage.

• Meet primary limits – Primary policies like auto and homeowners need high enough limits to qualify for umbrella protection.

• Aggregate vs per occurrence – Look for a per occurrence limit, which provides more coverage than an aggregate limit.

• Check underlying coverage – Make sure primary policies provide adequate coverage relative to the assets at risk.

• Coordinate policies – Align umbrella coverage with the primary policies to avoid gaps between them.

• Professional management – Consider Directors & Officers (D&O) policies to cover professional trustees.

Umbrella Policy Limit Recommendations

Experts recommend certain umbrella policy limits based on a trust’s asset value:

Higher net worth individuals should consult with insurance advisors to conduct a risk evaluation and determine appropriate umbrella coverage limits.

Examples of Umbrella Coverage for Trusts

Below are a few examples illustrating the importance of umbrella insurance when assets are held in a trust:

Vacation Home Example

John has a vacation home titled to an irrevocable trust created by his parents worth $2 million. The home itself is insured for $500,000 under the trust’s homeowners policy.

One summer, John’s friend Adam slips on a wet patio and suffers a spinal injury at the home. Adam sues John personally and also names the trust that owns the property for $3 million.

The primary homeowners policy covers only $500,000. Without umbrella coverage, the remaining $2.5 million claim would have to be paid from the trust’s assets and could nearly wipe out the value of the home itself.

With a $5 million umbrella policy naming John and the trust as insureds, there would be enough coverage to pay the claim in full without touching the trust’s assets.

Business Example

Sarah has $8 million in assets in a living trust that owns a retail business worth $3 million. She hires a professional trustee firm to manage the trust’s assets and business interests.

An employee at the retail store alleges the trustee firm has mismanaged trust investments and assets. The employee sues both the trustee firm and the trust itself for $4 million.

The trustee firm has its own E&O insurance but the $2 million limit falls short. Sarah’s homeowners insurance and business liability policies also have insufficient limits to cover the gap.

By having a $5 million umbrella policy covering Sarah personally and naming the trust entity, there is enough insurance coverage to pay the full claim value without the trust assets being impacted.

Umbrella Alternatives and Enhancements

Beyond a basic umbrella policy, those with substantial assets held in trust may consider additional risk management strategies:

• Higher umbrella limits – Purchase additional excess liability such as $10 million or more in umbrella coverage above a typical $1-5 million policy.

• D&O insurance – Covers liability for professional trustee services rendered to the trust.

• EPLI – Employment practices liability insurance protects against claims by trust employees.

• Cyber insurance – Covers data breaches, hacking incidents, and cyber risks affecting trust assets.

• Estate planning insurance – Policies that cover estate plans from being disputed or overturned.

The Bottom Line

Assets placed in a trust are shielded from many legal and financial risks. However, trusts themselves and their contents can still face substantial liability exposures that merit insurance protection. Umbrella insurance is a critical supplement to primary policies, covering the trust itself, trustees, and trust assets when large claims arise.

By naming the trust entity and individuals involved as insureds on an umbrella policy with sufficient limits, trust assets stay safely protected if lawsuits or liability situations occur. For high net worth individuals using trusts as part of their estate plan, umbrella insurance helps defend and preserve wealth for the benefit of heirs.