When people establish living trusts they are usually told to fund the trust by retitling assets, such as real properties, brokerage and bank accounts, but they are not usually told to name the trust as an additional insured on the homeowner’s insurance policy or on the title insurance policy. Such oversights can sometimes result in unnecessary probates even though title to the real property is held in the name of the decedent’s trust. Let us discuss.
First, consider a decedent’s homeowner’s insurance policy that names only the decedent as the insured even though the insured real property is owned by the decedent’s trust. That becomes a problem when an insurance claim check is received because the insurance company will either issue the check to the named individual or to the estate of the named individual, and not to the successor trustee.
If the deceased insured (to whom the check is made payable) has a small estate (presently one with a gross value under $184,500) then the trustee may be able to obtain a replacement check – one reissued in the name of the trustee — by providing the insurance company a small estate affidavit and attached death certificate of the deceased insured; this presumes both that the decedent’s will names the trust as the beneficiary (which is almost always the case) and that the insurance company will accept the risk associated with a small estate affidavit. The risk is because the small estate affidavit is not binding on the deceased person’s estate the insurance company may later face another insurance claim by the deceased person’s personal representative (after a probate proceeding is opened).
Moreover, if the deceased person’s estate is not a small estate – e.g., the value of the insurance check alone exceeds the small estate threshold – then the insurance company will not without a court order reissue the check payable to the trustee of the decedent’s trust estate. This is true even though title to the insured real property is held in the name of the decedent’s trust and is managed by the successor trustee.
To avoid such an unintended result the insured person who owns the real property simply adds their trust as an additional insured on the homeowner’s policy. Even if the homeowner is deceased, their successor trustee can receive an insurance payment check.
A similar issue also exists with respect to title insurance. Title insurance is obtained from the title insurance company at the close of escrow on the acquisition of title. It insures against any legal dispute arising from a possible defect in title (e.g., a cloud on titled). Adding the owner’s trust as an additional insured on title insurance means an additional endorsement called a CLTA Endorsement 107.9 from the original title insurer.
Avoiding probate is the single most important reason why people in California establish a living trust. Having an otherwise unnecessary probate become necessary because the trustee is not insured on the homeowners or title insurance policy, as relevant, would be unfortunate. Homeowner’s insurance claims are more likely to occur than title insurance claims. Accordingly, naming the trust as an additional insured on the homeowner’s insurance is more necessary than naming the trust as an additional insured on the title insurance, but both should be considered relevant.
The foregoing brief discussion is not legal advice. Consult a qualified attorney for guidance. Dennis A. Fordham, attorney, is a State Bar-Certified Specialist in estate planning, probate and trust law. His office is at 870 S. Main St., Lakeport, Calif. He can be reached at Dennis@DennisFordhamLaw.com and 707-263-3235
