It’s likely that you have questions about what you need to do as a trustee if you have been asked to do it. You also should be clear on your trustee insurance coverage.
There is some confusion about what certain coverage terms mean, especially when it comes to personal umbrella policies, which could put you at risk. The goal of this article is to clear up that confusion.
Trusts are commonly used as part of estate planning to help protect and distribute assets. Placing assets into a trust provides legal safeguards, but you may wonder if umbrella insurance is still necessary when utilizing a trust. This article looks at key reasons umbrella coverage is vital even with a trust, examines liability risks facing trusts, and provides recommendations to ensure full protection.
Overview of Umbrella Insurance
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Provides extra liability coverage above auto, homeowners, and other policies
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Kicks in when primary policy limits are exceeded.
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Typically offers $1 million to $5 million or more in additional coverage.
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Covers legal defense costs for lawsuits
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Relatively affordable way to protect assets from legal claims.
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Critical for high net worth individuals to shield wealth.
Why Umbrella Coverage Matters for Trusts
There are some important considerations why umbrella insurance is still essential if you have a trust:
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Exposure Beyond Primary Policies – Trusts often hold substantial assets that may not be fully protected if primary policies have insufficient limits for large claims. Umbrella insurance helps close this gap.
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Lawsuits Naming Trust – Legal actions can specifically name the trust itself as a defendant, putting trust assets at risk. Umbrella insurance helps defend the trust.
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Trustee Liability – Claims against professional trustees hired to manage the trust may not be covered without umbrella insurance.
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High Net Worth Risks – Wealthy individuals using trusts face increased litigation risks that warrant extra liability coverage.
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Trust Ownership – Assets like real estate owned by the trust need ownership-specific coverage like homeowners insurance plus added umbrella protection.
What Liability Risks Do Trusts Face?
There are several common exposures that can threaten assets held in a trust if lawsuits arise:
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Premises Liability – Injuries to visitors on property owned by the trust, such as a vacation home titled to the trust.
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Products Liability – Injuries from defective products made or sold by a trust-owned business.
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Professional Liability – Claims against hired trustees for poor investment decisions or mismanagement.
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Defamation – Lawsuits alleging reputational harm from false statements made by the trust or trustees.
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Breach of Contract – Allegations the trust failed to uphold a contract with vendors, clients, or other parties.
What You Need to Know About Trusts and Umbrella Insurance
When getting umbrella coverage for a trust, key considerations include:
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Naming the trust entity as an insured.
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Covering individual trustees as insureds.
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Reviewing policy exclusions affecting trusts and professional services.
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Meeting minimum primary policy limits to qualify for umbrella protection.
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Choosing per occurrence limits over aggregate limits.
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Ensuring adequate underlying coverage relative to assets at risk.
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Coordinating umbrella and primary policies to avoid coverage gaps.
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Considering D&O liability insurance to cover professional trustee services.
Umbrella Policy Limit Recommendations
Experts suggest the following umbrella policy limits based on a trust’s asset value:
| Trust Asset Value | Recommended Umbrella Coverage |
|---|---|
| Less than $1 million | $1 million |
| $1 million – $5 million | $3 million |
| $5 million – $10 million | $5 million |
| Over $10 million | $10 million+ |
Individuals with higher net worth should consult insurance advisors for a personalized assessment of appropriate umbrella coverage.
Examples Illustrating Umbrella Coverage Importance
Below are a few examples showing the significance of umbrella insurance for protecting trust assets:
Vacation Home Example
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John has a $2 million vacation home owned by an irrevocable trust created by his parents.
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The home itself has a $500,000 homeowners policy through the trust.
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John’s friend Adam slips and suffers a major spinal injury on the home’s wet patio and sues for $3 million, naming both John and the trust.
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The $500,000 homeowners policy would fall far short. But with a $5 million umbrella policy covering John and the trust, there would be enough coverage to pay the claim without impacting trust assets.
Business Example
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Sarah has $8 million in assets in a living trust that owns a $3 million retail business.
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She hires a professional firm as trustee.
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An employee sues the trustee firm and trust for $4 million for alleged mismanagement.
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Sarah’s homeowners, business policies, and the trustee firm’s E&O policy still leave a gap.
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By having a $5 million umbrella policy naming Sarah and the trust, there is sufficient coverage to fully pay the claim.
Umbrella Alternatives and Enhancements
In addition to a basic umbrella policy, those with substantial trust assets may consider:
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Higher umbrella limits of $10 million or more.
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D&O liability insurance to cover professional trustee services.
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EPLI to cover employment-related claims.
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Cyber insurance for data breaches and hacking incidents.
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Estate planning insurance to protect estate plans from disputes.
The Bottom Line
While assets placed in a trust receive legal protections, the trust itself and its contents can still face major liability risks requiring insurance coverage. Umbrella insurance is a key supplement to primary policies, covering the trust entity, trustees, and trust assets when lawsuits or claims occur.
By naming the trust and associated individuals as insureds on an umbrella policy with adequate limits, trust assets remain safely protected. For high net worth people using trusts in their estate plan, umbrella insurance is crucial to defend and preserve wealth for heirs.
What Is a Qualifying Organization?
The next often misunderstood term my client and I discussed was “qualifying organization. A qualifying organization in this case is “any not-for-profit organization qualifying for tax-exempt status under Section 501(c)(3), (4) or (7) of the Internal Revenue Code of the United States, or any subsidiary thereof, including the following organizations:
- Religious, educational, charitable, scientific, or literary organization
- Civic league, social welfare organization, or local association of employees
- Social or recreation club
One important thing we learned from the language is that the endorsement only covers the time the person holds the position. This language means that acts done before becoming a trustee are not covered, and acts done after resigning are also not covered.
It also says in the insurance agreement that coverage only kicks in if the qualifying organization doesn’t pay for the director or trustee’s loss or if the qualifying organization can’t pay because it’s bankrupt.
This clause makes the coverage analogous to what for-profit insurance policies call “Side A” coverage, which is only available if there is no indemnification by the non-profit entity. Therefore, trustee coverage would only apply if it was determined there was no available indemnification from the entity.
What’s more, acts that happen because an insured person does or doesn’t do professional services, or professional services that any insured person is legally responsible for, are not covered. As we have pointed out, most services performed by a trustee will fall within this exclusion.
Is a Trustee Liability Insurance Policy Necessary?
I was recently asked by a client if the separate trustee liability insurance policy premium was worth it since their broker had told them they could buy a $1,200 extension under their excess umbrella policy.
My first step in answering this question was to request a copy of the proposed endorsement.
| Although my analysis concerns a specific endorsement issued by one carrier, there are enough similarities between it and similar endorsements from other high-net-worth carriers that it applies to other insurers. |
The title of the proposed endorsements is “Non-Profit D Its an example of how terminology can become confusing. In this case, the reference to “trustee” concerns the trustees of a non-profit entity.
In the context of a charity, some people use the words “directors” and “trustees” interchangeably, but they are not the same thing. The word “director” is usually used for a non-profit organization, while the word “trustee” is usually used for a charitable trust. Therefore, the intent of this particular endorsement is to cover insureds serving a non-profit organization.
However, a trustee of a trust is an entirely different role. A trustee is responsible for administering assets of a trust based on instructions drafted in the trust instrument. These jobs are more like professional services than management services for an entity because they involve investing, reporting, managing, and giving out trust assets. Therefore, this endorsement does not extend coverage to a trustee of a trust.
My client realized the language was vague but thought there was still potential coverage. As a result, I decided to look more deeply into insurance contact. This step involved further exploration of confusing terminology.
Do I Need Umbrella Insurance?
FAQ
Who really needs umbrella insurance?
Should home insurance be in the name of trust?
At what net worth do you need umbrella insurance?
Do I need to put life insurance in trust?