Umbrella policies and trusts

[explanade]

I have an umbrella to cover my assets.

My parents created a trust about 20 years ago and my father passed last year.

My mother resigned as trustee and made me the trustee. She had had no involvement with managing the finances, even paying monthly bills.

But she lives in their home, which is probably the biggest asset held under trust.

Would she need to get umbrella policy coverage to cover all the estate assets, with some held under trust and some under her name?

Or would I as trustee need to get additional coverage?

Or would it be possible to get umbrella coverage for the trust or estate?

 

[capjak]

I would see an Estate Lawyer

 

[ERD50]

Just to be clear, an umbrella policy does not "cover assets".

We've discussed this a few times here. If you have $1M in assets and $1M umbrella, and get a successfully sued for $2M, they get your $1M and the insurance company's $1M. You are wiped out.

-ERD50

 

[Slow But Steady]

Just to be clear, an umbrella policy does not "cover assets".

We've discussed this a few times here. If you have $1M in assets and $1M umbrella, and get a successfully sued for $2M, they get your $1M and the insurance company's $1M. You are wiped out.

-ERD50

Note, however, that the insurance company is required to defend you. At least that is what my agent says.

He talked me out of raising the limit on my policy from $1MM to $2MM.

 

[45th Birthday]

Check with your agent, but the trust should be able to be listed as a named insured.

 

[explanade]

Just to be clear, an umbrella policy does not "cover assets".

We've discussed this a few times here. If you have $1M in assets and $1M umbrella, and get a successfully sued for $2M, they get your $1M and the insurance company's $1M. You are wiped out.

-ERD50

Note, however, that the insurance company is required to defend you. At least that is what my agent says.

He talked me out of raising the limit on my policy from $1MM to $2MM.

Right so the idea is to get coverage greater than your assets so that you don't have to liquidate them for the judgement?

Don't PI plaintiffs invariably chase people for the assets? No use suing for $10 million if the defendant doesn't even have a million in assets?

 

[VFK57]

An umbrella policy designed to protect you when your insurance policy (usually auto or home) max amounts of payment is not enough. For example if you or your mom have auto insurance max payments come to $500K while you are used for $1.5 mil the umbrella insurance will cover the rest. To predict what amount may be needed is difficult, although high cost accident are rare , they happens ($2- $10 mil). You have to decide for yourself but as I recall a similar discussion some people do not have it at all while others have it at $5mil

 

[ERD50]

Right so the idea is to get coverage greater than your assets so that you don't have to liquidate them for the judgement?

Don't PI plaintiffs invariably chase people for the assets? No use suing for $10 million if the defendant doesn't even have a million in assets?

I think all we can do is try to cover the amount we might be sued for. That's not anything that can really be defined, so I think it just became a convenient guideline to say match your assets. It's not a good answer, just like "plan on spending 80% of your current income in retirement" isn't a good answer. But it's easy to say, so they go with 'easy'.

I've heard (but don't know) that the amount of insurance and net worth are discover-able. So if you have NW of $1M, and insurance for $10M, they might sue for $11M? Or $100M, and the judge approves $11M?

I don't think there are any answers, other than the more coverage you have, the more motivated the insurance company is to defend [-]your[/-] their interests. You get to go along for the ride.

-ERD50

 

[Ready]

Just because someone sues you for $5M doesn't mean they are going to get $5M. Something pretty bad would have to happen to entitle them to that large of an award. If you have a $5M umbrella policy and they sue for $10M, there's a pretty good chance they will settle for the $5M rather than going through protected litigation and possibly getting a lot less.

 

[ERD50]

Just because someone sues you for $5M doesn't mean they are going to get $5M. Something pretty bad would have to happen to entitle them to that large of an award. If you have a $5M umbrella policy and they sue for $10M, there's a pretty good chance they will settle for the $5M rather than going through protected litigation and possibly getting a lot less.

Yes, but what if you have $1M NW with a $5M umbrella, they sue for $10M and settle for $6M.

You are wiped out.

-ERD50

 

[Ready]

Yes, but what if you have $1M NW with a $5M umbrella, they sue for $10M and settle for $6M.

You are wiped out.

-ERD50

So don't offer to settle for $6M. Offer $5M or let them go through years of protracted litigation. It's a pretty easy choice.

 

[ERD50]

So don't offer to settle for $6M. Offer $5M or let them go through years of protracted litigation. It's a pretty easy choice.

I guess we have a different definition of the word 'settle'.

And since the insurance company is probably the one running the show, once the negotiation gets above $5M (what they are on the hook for), I don't see where they are all that motivated to pay their lawyers to try to hold them at $5M, or $5.5M - at that point it is your money, not theirs.

So you could hire your own lawyers, but they would have to pick up from the ins company lawyers, and... none of that sounds cheap, with no assurance of it constraining your losses.

-ERD50

 

[Dash man]

Yes, but what if you have $1M NW with a $5M umbrella, they sue for $10M and settle for $6M.

You are wiped out.

-ERD50

Unlikely. The extra million will take years to get. They usually settle for a lesser amount to get the money quicker.

 

[Ready]

I guess we have a different definition of the word 'settle'.

And since the insurance company is probably the one running the show, once the negotiation gets above $5M (what they are on the hook for), I don't see where they are all that motivated to pay their lawyers to try to hold them at $5M, or $5.5M - at that point it is your money, not theirs.

So you could hire your own lawyers, but they would have to pick up from the ins company lawyers, and... none of that sounds cheap, with no assurance of it constraining your losses.

-ERD50

Let's go through an example. Suppose you are involved in an auto accident with a loss of life. The estate of the deceased will send a notice of intent to file a lawsuit and offer to engage in settlement discussions. At that point your insurance company will take the lead and assign an attorney.

The estate will go through discovery to learn the insurance policy limits. That is easy enough to find. They may also do discovery on your personal assets and discover another $1M in assets they could go after.

At some point an offer to settle will be made. The estate will demand $10M. The insurance company will offer $1M. It will go back and forth until either the parties settle on an amount within the insurance limits, or a lawsuit will be filed. It's the insurance companies responsibility to pay legal fees to defend you. They can offer up to $5M to settle if they believe they need to do so, but if they think they can win a smaller settlement they may let the case proceed with litigation.

The insurance company can not offer above $5M since that is their limit, and they have no authority to offer your assets as part of the settlement. So at some point the $5M may come up as the take it or leave it final offer. At that point the estate will have to decide whether to take $5M immediately or go through protracted litigation in the hopes of getting $6M. This will never happen. They will settle for $5M and walk away.

I've managed insurance portfolios for my clients for 15 years with limits up to $500M. I used to go through this on a weekly basis (unfortunately).

 

[MJ]

Unless one did something so irresponsibly disastrous while drunk or high, I don't see a successful lawsuit that would cost millions. I also suspect any insurance company would fight tooth and nail to avoid having to pay millions as well.

 

[ERD50]

....

The insurance company can not offer above $5M since that is their limit, and they have no authority to offer your assets as part of the settlement. So at some point the $5M may come up as the take it or leave it final offer. At that point the estate will have to decide whether to take $5M immediately or go through protracted litigation in the hopes of getting $6M. This will never happen. They will settle for $5M and walk away.

I've managed insurance portfolios for my clients for 15 years with limits up to $500M. I used to go through this on a weekly basis (unfortunately).

OK, thanks, I can see that, and since you say that is your experience, I accept it.

But in the less extreme case - $1M NW and $1M umbrella, it's not an extra 20% they are looking at, it is an extra 100% - they might decide to go after it?

And I think trying to get a $5M umbrella with a net worth of $1M would raise eyebrows at the insurance company - are you engaging in risky behavior ( i know there are exclusions for some things)?

Unless one did something so irresponsibly disastrous while drunk or high, I don't see a successful lawsuit that would cost millions. I also suspect any insurance company would fight tooth and nail to avoid having to pay millions as well.

Well, we buy insurance to cover the unexpected, and sometimes the unknown unknowns. Yes, they will fight tooth and nail up to their limit - and then you are on the hook.

-ERD50

 

[Ready]

I pay $800 for a $5M umbrella policy. A $1M policy would cost about $250. So for the extra $550 it's worth it to me for the piece of mind. I've never been asked to prove I'm worth $5M nor questioned by my broker as to why I need the $5M in coverage. They seem to be pretty happy to write the policy and take their commission on it.

 

[Golden sunsets]

We have a $4M policy that costs $633/yr, which seems in line with Ready's pricing. The policy also covers us both personally and as trustees of the revocable trust that owns our home. A simple endorsement suffices to cover the trust.


Sent from my iPad using Early Retirement Forum

 

[swaneesr]

A few years ago, my wife and I set up a couple trusts during the estate planning process. We delayed this process for a long time assuming it would be expensive and also would require us to stop avoiding making some “what if” decisions.

The results of meeting with an attorney were that we were given clear directions on insurance requirements and coordination between policies and beneficiaries designations, etc.

In hindsight is was not difficult to understand. We were just avoiding the whole topic of death.

I suggest the OP and Mom review the trust with the attorney who helped set things up if they have not already. Bring all your questions. I understand that the trust was setup 20 years ago, so maybe you need to review with a different attorney. It just seems a review should be done of the whole setup. If the biggest asset is the home, than this does not seem to be an unusually complex situation.

 

[bingybear]

OP, you talk about the trust without giving specifics. A trust is not a trust. You say the trust was formed about 20 years ago. When we did our first trust about 13 years ago the common trusts were to set as individual revocable trusts that each individually become irrevocable upon the death of each grantor. Newer trusts such as joint trusts may not become irrevocable on the death of the first to die. It all depend how the trusts are written.

Typically the assests of a revocable trust can be insured with the grantor's other assets. When it becomes irrevocable I don't think insuring assets combined would be good since the irrevocable trust is meant to separate assets. The trust becomes its own entity. Also the irrevocable trust must file it's own taxes under significantly different tax rates/rules.

First things first, find out what state your trusts are in. revolvable, irrevocable, a mixture of trusts? Do you have one trust? Are there really two trusts?

EDIT --- be careful that you know who is covered and for what. Does it insure you (as a person), you (as a trustee), the trust for assets in the trust (like a house), your mom, etc.
if you have a irrevocable trust, you may want to think of it as a separate person.

 

[RetireBy90]

And I think trying to get a $5M umbrella with a net worth of $1M would raise eyebrows at the insurance company - are you engaging in risky behavior ( i know there are exclusions for some things)?

-ERD50

We just purchased a $2M umbrella and no questions about net worth.

 

[Dash man]

We have an umbrella policy of $5M on top of a $1M liability policy for each our auto and homeowners policies. We updated our estate plan last year and our attorney had us dissolve the joint trust and created two individual trusts with the same beneficiaries. Neither trust is funded until the first of us passes, then our wills pour all assets into the surviving spouses trust. All assets are currently in joint ownership except for 401ks and IRAs, where we are each other’s beneficiary. When she explained the reasoning for this it all made sense, but I honestly can’t explain the reasoning today. I do remember she told us if we wanted to keep the joint trust she couldn’t be our attorney because under current laws was not the best course of action for us. So if you have a joint trust and have not reviewed it with an attorney recently, it’s probably time for a redo.

 

[ncbill]

IMHO people on these threads seem awfully flippant about the ease of obtaining a judgment.

It's not a perfect analogy, but over a decade ago I was involved with a PI suit against the business where I worked where the plaintiff was left crippled after a "slip & fall" on the property.

Instead of accepting a settlement (~$2 million, IIRC), they sued for over $10 million.

Several years later, they lost at trial. Single parent, sole provider for several children.

The above is another reason why these cases always settle as long as you are wise enough to pay for a modest amount of umbrella coverage.

 

[ERD50]

IMHO people on these threads seem awfully flippant about the ease of obtaining a judgment. ...

Why do you say that? I don't see where anyone was assuming any particular judgment would be made, we are just planning for the possibility (however slight) of it.

That's what insurance is for - protection against low chance events. If you know something will happen, just pay for it and eliminate the middleman.

-ERD50

 

[explanade]

OP, you talk about the trust without giving specifics. A trust is not a trust. You say the trust was formed about 20 years ago. When we did our first trust about 13 years ago the common trusts were to set as individual revocable trusts that each individually become irrevocable upon the death of each grantor. Newer trusts such as joint trusts may not become irrevocable on the death of the first to die. It all depend how the trusts are written.

Typically the assests of a revocable trust can be insured with the grantor's other assets. When it becomes irrevocable I don't think insuring assets combined would be good since the irrevocable trust is meant to separate assets. The trust becomes its own entity. Also the irrevocable trust must file it's own taxes under significantly different tax rates/rules.

First things first, find out what state your trusts are in. revolvable, irrevocable, a mixture of trusts? Do you have one trust? Are there really two trusts?

EDIT --- be careful that you know who is covered and for what. Does it insure you (as a person), you (as a trustee), the trust for assets in the trust (like a house), your mom, etc.
if you have a irrevocable trust, you may want to think of it as a separate person.

Yes my parents set up a trust as co-settlors. The original attorney is long gone and we hired a trust administration attorney.

I haven't asked her about umbrella coverage yet.

But she's been generally talking about how we will split the assets up among several trusts, the one tied to my late father is irrevocable but we can create a trust for my mother which is revocable while she is alive.

We haven't done the mapping of how the assets will be delegated.

The idea is to minimize estate taxes down the line.

My mother is 83 and she still drives so I wanted to make sure we cover her to the highest extent possible.

But recently we refinanced the mortgage on her residence, which is held in trust.

So I applied for her and at closing, when they discovered she resigned as trustee and that I'm now trustee, they had to change the paper work around. Essentially, I assign the property to her temporarily for the purpose to getting the new mortgage and then she assigns it back to the trust.

That is why I'm unclear on whether to get umbrella policy for her or increase the coverage on my own policy to cover some of the estate assets.