The Practical Tax Lawyer | 

Michael S. Arlein and Timothy O’Brien

Practitioners who treat property and casualtyinsurance as an afterthought risk exposingtheir clients to liability.

A number of the most common

estateplanning techniques recommended by practitioners in- volve the transfer of a client’s personal residence to anentity such as a limited liability company, limited part-nership, or trust. Estate planning attorneys recommendsuch transfers for a number of reasons, including protec-tion from creditors, avoidance of probate, facilitating gift-ing of fractional interests in a residence, and providing amechanism for the management of property owned bymultiple individuals or families. Transferring residential

property to a qualied personal residence trust also re

-mains a popular and effective strategy for gifting.When implementing these “bread-and-butter” estateplanning techniques, practitioners often neglect a crucialaspect of the transaction—restructuring the property and

casualty insurance that is in place to reect the transfer of

ownership of the residence to an entity. In the event of aloss, the failure to address this issue could have unintend-ed and potentially devastating consequences. This articlefocuses on the need to properly structure homeownerinsurance policies, which are commonly used to protectresidences that are transferred to an entity.

Timothy O’Brien

is Director o Private Client Servicesat Cook, Hall & Hyde, Inc., aninsurance brokerage rm that ofersproperty and casualty solutions orthe high-net-worth marketplace.

Will State Farm Be There? Often OverlookedProperty And Casualty Insurance Aspects Of Common Estate Planning Transactions

Michael S. Arlein

is a senior associate in the PersonalPlanning Group o Patterson BelknapWebb & Tyler LLP, a law rm o nearly200 lawyers delivering a ull range o services in such areas as tax, trusts andestates and litigation.

 | The Practical Tax Lawyer Summer 200

ProPerty & cAsuAlty InsurAnce 101•

Many practitioners operate under the logical butfalse premise that a policy insuring a residentialproperty—a homeowner policy—covers the actual

home. In fact, the party that receives the benet of

coverage is the named insured. The following is a

common denition for named insured in a home-

owner policy:

“Insured means you and residents of your household who are your relatives, or other persons under theage of 21 and in the care of any person mentioned above.”

A homeowner policy generally offers the namedinsured protection from two important categoriesof loss—property damage and liability. Coveragefor property damage protects the insured fromdamages to a residence and its contents caused by

perils such as wind, re, water, and theft, while li

-ability coverage protects the insured when his orher actions or omissions cause losses to others, in-cluding bodily injury and property damage.The broad liability coverage that is provided bya homeowner policy is often overlooked, yet servesas a critical form of asset protection by covering losses the insured incurs anywhere in the world.In addition, regardless of the merits of any law-suit brought against the insured, liability protectionalso obligates the insurance carrier to provide theinsured with a legal defense.Since the contract language used in homeown-er policies was developed when individuals, notentities, owned homes, a traditional homeownerinsurance policy does not convey any contractual

benets to any party other than an individual. Giv

-en this background, it is evident that if residentialproperty is transferred from an individual to anentity and no adjustments are made to coverage,the unfortunate and unintended consequence isthat the insurance coverage that protected the in-dividual who previously owned the property maynot be available to protect the new entity-owner.Especially when asset protection is among the pri-mary reasons for transfer of property, the potentialabsence of important insurance protection is espe-cially ironic and problematic.

tAIlorIng InsurAnce ProtectIonto meet need •

To avoid gaps in coverage,attorneys must ensure that insurance policies arestructured to protect the interests of all parties whohave an insurable interest—that is, something tolose—in the event of a property or liability claim.These may include a number of different individu-als and entities, for example: the trust, limited li-ability company, or limited partnership that ownsthe residence; the trustee, manager, general part-

ner, or other duciary of the entity; and the indi

- viduals who occupy the residence, who are often

the beneciaries or owners of the entity.Given the complex nature of negotiating ap

-propriate insurance coverage, attorneys shouldseek assistance from an experienced, independentinsurance agent to assess coverage requirements,which will depend on several different factors, butmost particularly, how a residence will be used. Indetermining coverage requirements, the following questions should be considered: Who will occupy the residence?Is any business conducted on the premises?Has the trust, limited liability company, orother entity been created for purposes otherthan ownership of the residence?Does the entity own other property? Who are the parties to the trust, limited liabil-ity company, or other entity? Are there other forms of liability protectioncovering the property?By way of example, consider the following fact

pattern that describes a common risk prole for an

entity-owned residence: (i) a trust, limited liabilitycompany, or limited partnership is formed in or-der to hold a family residence; (ii) the family whohas transferred ownership of the residence to thenew entity continues to live in the residence; (iii) thefamily retains personal ownership of the furniture,••••••

Property/Casualty Insurance And Estate Planning | 

furnishings, and other contents of the home; and(iv) the family occupants are closely connected to

the entity—as grantors, trustees, and beneciaries,

in the case of a trust, or as managers, general part-ners, members, or limited partners, in the case of a limited liability company or limited partnership.

The table below identies the insurable interests of each party for this common risk prole and illus

-trates the wide range of coverage needs:

Pa wi cva rqiIa I

Entity (Trust, Dwelling—owned byLLC or LP) the EntityOther Structures—owned bythe EntityPremises Liability—Entity canbe named in a suitFiduciary (Trustee, Premises Liability—

Manager, General) Fiduciary can be named in a

suitOccupants Contents—Owned by occu-pants Additional Living Expenses(loss of use)—occupantswould incur costs to resideelsewhere after a covered lossLiability—Occupants’ neg-ligence may cause them tobe named in a suit; coveragerequired for this location andelsewhere

Unfortunately, many insurance carriers nd it

challenging to understand and underwrite the risksassociated with entity-owned residential propertyand have been reluctant to offer comprehensiveinsurance to entities, particularly liability coverage.

Even in the case of the common risk prole de

-scribed above, most insurance carriers do not of-fer adequate coverage for all parties with insurableinterests. The endorsement most commonly usedby carriers—

Residence Held In Trust HO 05 43

—cov-ers only a residence held in a trust. However, aselect group of carriers that specialize in meeting the residential coverage needs of high-net-worth

clients—AIG Private Client Group, Chubb Group

of Companies, and Fireman’s Fund InsuranceCompanies—offer a range of endorsements which,when properly structured, can provide coverage in virtually any situation.Below is an example of an “additional insured”endorsement that can be used to structure coverageto protect the insurable interests of each of the par-

ties in the common risk prole described above:

Aiia I – ri Pi

Name and address of person or organization:

The denition of insured in this policy includes the person or

organization named above with respect to:

cva  daa  y Pp

Dwelling and Other Structures; and

cva  liaii a mia Pa o

The person or organization named above is covered for Li-ability and Medical Payments to others but only with respectto the residence premises and only where the person or or-ganization is held liable for an act or failure to act by anyinsured.

InsurAnce ProtectIon should notbe An Afterthought •

Attorneys general-ly exercise great care in structuring estate planning transactions to avoid exposing their clients to un-intended tax consequences. However, an informalsurvey of practitioners who routinely recommendestate planning techniques involving the transfer of residential property to entities indicates that manyattorneys are not exercising the same care when itcomes to protecting their clients from exposure toliability for uninsured losses. In many cases, it may

not be sufcient for an attorney to merely advise

the client to have his or her coverage reviewed bythe local insurance agent. Many agents do not have