You Thought Your Trust-Owned Home Was Insured

When you signed your trust, you felt pretty good about having it done. You felt even better when you deeded your home into your trust. You breathed a sigh of relief because your trust now owns your home and you were told it will avoid probate upon your death. But did you even think about adding your trust on your homeowner’s insurance policy? You should have. If it isn’t and the house was damaged by fire or other casualty, or someone else was injured on the property, you probably would not have any insurance coverage, even if you paid your insurance premium. You and/or your trust would be the ones on the hook.

On April 10, 2018, the Michigan Court of Appeals released an opinion which summarized and reinforced Michigan contract law as it relates to insurance claims on trust-owned real estate. The court said that when a trust owns real estate and there is an accident or injury on the property, if the trust is not a named insured on the property insurance policy, the insurance company does not have to pay the claim.

If your home is in your trust, you better make darn sure that your trust is a named insured or additional insured on your homeowners insurance policy. We have been doing this for our clients since 1999 when we started doing fully-funded trust-based estate plans. You may have heard that your trust will not work the way you want it and avoid probate unless you fund it. But what is this funding and why is it important?

Trust funding is completely and correctly designating your trust and individuals as owners, beneficiaries and insured parties of your assets. Basically, it’s putting your stuff in your trust. The proper funding of your trust is critical in making your estate plan work and having the results you plan. Failure to properly fund your trusts may cause unintended results. These may include probate during your lifetime or after death; distributions not in accordance with your goals and objectives; additional taxes; and additional administrative, legal and other expenses.

You may not have been told by your estate planner that you needed to fund your trust. Or you were told by your estate planner that you needed to fund your trust, but you just never got around to it. Or the only trust funding your estate planner did was quit claim deeding your home to your trust, but nothing else.

With our new clients who have existing trusts prepared by other estate planners, we almost never see our client’s trust named in their homeowners policy. And it’s a good thing we discover that. If we didn’t and they would have had a loss for which the insurance company wouldn’t pay out, it could be financially devastating. Even though we have been doing fully-funded trust-based estate plans since 1999 and I have been writing about full-funding trusts in this column since 2008, I know of no other attorneys or law offices in St. Clair or Sanilac Counties who will make sure that your trust is fully-funded. If there are any, I would like to know about them.

Your home is one of your most valuable, if not the most valuable, of your assets. Real estate is also one of the most complicated types of assets to fund into your trust. This is especially true if you have a mortgage. Your real estate with a mortgage requires at least four steps or “funding transactions” to be properly placed or funded into your trust.

The first step is to notify your mortgage lender of the transfer to your trust. Most all mortgages nowadays have a provision that if you sell or transfer your real estate, the entire balance of your loan can be demanded by your lender. This is called a due-on-transfer clause. However, pursuant to state and federal statutes, that provision is unenforceable when you are transferring your primary residence to your own revocable trust.

If the real estate is not your primary residence, you should request a waiver of the due-on-transfer clause from your mortgage lender. Do not transfer this real estate to your revocable trust until you receive the waiver from your lender. Some lenders may require you to pay a fee to obtain this waiver.

When you have a home equity loan or line of credit, there is also a mortgage to secure payment of that loan. Because of this, you also have to notify your home equity lender of the transfer to your trust if it is your primary residence, or request the waiver of the due-on-transfer clause from your home equity lender for other real estate.

After step one, the second step is to transfer your property to your trust, usually by a deed. You may have been told by a financial advisor, banker, tax preparer, insurance agent, realtor, register of deeds or friend that all you need to do to put your home in your trust is to prepare a quit claim deed using the legal description on the county website. You may even have been given a form to fill out. This may be tempting, but:

  • DO NOT follow this advice. We regularly fix the results of this bad advice. In most instances, it costs more to fix a bad deed, if it can be fixed, than it would have been to do it right in the first place.
  • DO NOT use a quit claim deed. It can void your title insurance or cause a hiccup in the chain of title. Use a warranty deed instead.
  • DO NOT use the legal description from the county website. This tax description is not always a complete legal description and could result in only part of your property going into your trust.
  • DO NOT draft your deed yourself. A deed may look simple because it is only one page. But if you do not understand real estate law, you can mess it up really bad, really easily. Then you have to pay big bucks to fix it, if it can be fixed at all.
  • DO NOT hold your deed unrecorded. Your unrecorded, undelivered deed is void upon your death and is legally ineffective to transfer title of your real estate. Make sure all your deeds are recorded.

The third step of funding your real estate into your trust, is to file a property transfer affidavit with your local assessor. This prevents the “uncapping” of the taxable value of your property to the current state equalized value.

The fourth and final step in funding real estate into your trust is adding your trust (and your spouse’s trust) as insureds or additional insureds on your homeowners insurance policy. This prevents the insurance company from denying a claim because the property owner, the trust, is not an insured.

And do not rely solely on your agent’s statements that is has been done, get written verification directly from your insurance company, usually with updated declaration pages. Our experience with insurance companies since 1999 is that in about a quarter to a third of the time, when an agent makes a change with the insurance company, the change does not get recorded at the company level. The change gets lost in Never Never Land.

A fully-funded trust-based estate plan will cost more up-front than an unfunded trust or a will-based plan, but will result in substantial savings and reduced hassle upon your disability or death. But if you don’t properly fund your trust during your lifetime while you are able, it usually costs even more to do it after your disability or death, and you could also have some of the unintended results. Although an unfunded trust or a will-based plan can be real cheap to set up, they both will typically result in substantial fees after your death, including probate. The wisest choice is to just bite the bullet and pay to have the funding of your trust done right the first time and then properly maintain your plan.

If you have a trust, make sure that ALL of your assets are properly funded into your trust. If completely and correctly funded, your trust-based estate plan will keep you in control while you are alive and well; provide for you and your loved ones during your mental disability; and after you are gone, give what you have to whom you want when you want the way you want; all at the lowest overall cost to you and your loved ones.

By Matthew M. Wallace, CPA, JD

Published edited April 22, 2018 in The Times Herald newspaper Port Huron, Michigan as: Is your trust-owned home insured?

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