Homeowners may choose to transfer their interest in real estate to a trust for a variety of reasons. In some cases, they worry about the possibility of lawsuits or future debt collection efforts. Other times, they may want to protect a farm or ranch from the risk of division should a divorce occur.
Moving a property into a trust can be beneficial by providing a degree of separation between an individual owner and what may be their most valuable asset. Unfortunately, there are a few complications that arise from holding title through a trust rather than as an individual. There can be property tax implications in many communities. In fact, there could also be insurance issues if the owner doesn’t change the information on their policy.
Homeowners insurance protects the interest in the property
People sometimes mistakenly believe that a homeowners insurance policy specifically protects the dwelling unit that they use. However, the policy actually protects them as an individual with an interest in the property. Once they transfer that interest to a trust, they no longer have a direct personal interest to insure. Should some kind of catastrophic event occur, like a house fire or a robbery, the homeowner may find that they are not eligible for coverage because they do not currently have an interest in the home anymore.
The trust is the entity with a legal interest in the property. Therefore, it is typically necessary to communicate with an insurance provider about the decision to transfer a home into a trust. The trust itself must be included as a protected party in the policy documents. Otherwise, the property owner may not be able to make a claim against their coverage should their home become uninhabitable or require major repairs. Small mistakes when creating a trust can lead to major financial challenges for the trustor. Those who have proper support when establishing a trust can identify potential sources of risk, such as the need to alter insurance coverage.
Moving a home into a trust can be a smart move, but property owners must ensure that doing so does not compromise their other protections. Homeowners insurance policies typically require review when someone changes how they hold title to an insured property.