Estate planners and financial planners keep up a constant call to use a living trust and avoid probate. Yes, the living trust works well to avoid probate, IF it is used properly. In order to avoid probate, the trust has to own the real property that would be subject to probate.
BUT, what happens to the property and casualty insurance when property is put into a living revocable trust? Well, nothing, provided…
The trust must be what is called a “grantor trust.” The most important factor is to determine whether the trust is revocable. Additionally, the Grantor (person setting up the trust), the Trustee (the person managing the trust), and the Beneficiary (the person who gets the benefits from the assets held in the trust) should ALL be the same person – you.
If the trust is a grantor trust, the insurance shouldn’t have any beef with you putting property into the trust. For basically all legal purposes, the trust is still you. The insurance company has agreed to insure your specific property. You will receive the benefit of the insurance, should it ever pay a claim.
Just to be sure everything is ok, give your insurance agent a heads up. Call and make the trust a second insured on the policy, it the agent thinks that is necessary. Because the trust is you legally, there isn’t any legal reason the insurance company should need to change the insurance policy. However, insurance companies make up their own rules.
In all actuality, the trust isn’t really you, but Federal Law says that when you put property into the trust the state, other government agencies (the IRS), and other folks shouldn’t change the rules on you. So, your property casualty company shouldn’t change the rules. If they try to change the rules, ask to speak to the insurance company’s legal beagle and explain how your trust is a grantor trust.
Putting property into a living trust is totally different than putting property into a company, such as a family limited partnership, LLC or corporation, and the effect on the property and casualty insurance is totally different (see When Property is Deeded to an LLC or Corporation for more information on the effects of putting property into a company).