Trust Law

[asechrest]

I know we've got some legal geeks here, so I thought I'd throw this up.

I am trying understanding some elements trust law. My research indicates that a trust is really a legal construct that bifurcates ownership, with legal title being held by the trustees and equity title being held by the beneficiary. Further, my understanding is that the trustees may be "personally" liable and sued as individuals if suit is filed against the trust. I've seen some case law that says when you sue a trust, you actually sue the trustees.

I am trying to understand two things: which individuals or entities have insurable interest in the trust property, and of those individuals or entities, who has the most interest. Based on my reading, I think I could argue that the trustees and beneficiary all have insurable interest. (And maybe the grantor?). But it would seem that the trustees are most important. But IANAL.

I guess I am essentially asking, if you had to form a hierarchy of trust entities, from most important to insure vs. least important to insure, how would it be ordered?

(As background: I'm in a heated argument among insurance folks, with some saying only the beneficiary has insurable interest. I believe otherwise.)

 

[LDJones]

The trust is a "person" in the eyes of the law, so ownership of the trust asset(s) is/are held by the trust itself, not the trustee. Generally, the trustee is not personally liable unless they act contrary to their fiduciary duty to the trust. Insurance on trust assets is in the name of and for the benefit of the trust.

Caveat: Free legal advice is worth every penny you pay for it! Consult a lawyer in your jurisdiction to really know your rights.

 

[bradg33]

The trust is a "person" in the eyes of the law, so ownership of the trust asset(s) is/are held by the trust itself, not the trustee. Generally, the trustee is not personally liable unless they act contrary to their fiduciary duty to the trust. Insurance on trust assets is in the name of and for the benefit of the trust.

Caveat: Free legal advice is worth every penny you pay for it! Consult a lawyer in your jurisdiction to really know your rights.

Not always - in some, or many, states, the trust itself is more or less a legal fiction. All of the trust's assets are held in the name of the Trustee, on behalf of the trust. So, a "trust" can't be sued directly; you have to sue the trustee, "as trustee" of the trust. So if Bob is Trustee of the Joe Smith Irrevocable Trust, you cannot sue the Joe Smith Irrevocable Trust; you MUST sue Bob, as Trustee of the Joe Smith Irrevocable Trust. As a general rule, Bob is not being sued in his individual capacity and is thus not individually liable for the trust's liabilities.

There are some exceptions, the main one coming to mind being the Massachusetts Business Trust, which actually is a legal entity in and of itself.

I don't do insurance law, so I can't speak to who might have an insurable interest in Trust property, but my gut tells me the beneficiaries would not, as they have no legal interest in the property, and the Trustee, as the title holder, would.

 

[Fearless Tower]

Not always - in some, or many, states, the trust itself is more or less a legal fiction. All of the trust's assets are held in the name of the Trustee, on behalf of the trust. So, a "trust" can't be sued directly; you have to sue the trustee, "as trustee" of the trust. So if Bob is Trustee of the Joe Smith Irrevocable Trust, you cannot sue the Joe Smith Irrevocable Trust; you MUST sue Bob, as Trustee of the Joe Smith Irrevocable Trust. As a general rule, Bob is not being sued in his individual capacity and is thus not individually liable for the trust's liabilities.

There are some exceptions, the main one coming to mind being the Massachusetts Business Trust, which actually is a legal entity in and of itself.

I don't do insurance law, so I can't speak to who might have an insurable interest in Trust property, but my gut tells me the beneficiaries would not, as they have no legal interest in the property, and the Trustee, as the title holder, would.

So, if Bob is the Trustee and Bob is a pilot who crashes his Learjet into a schoolyard full of kids, who get's sued? Bob or the Trust?

 

[bradg33]

So, if Bob is the Trustee and Bob is a pilot who crashes his Learjet into a schoolyard full of kids, who get's sued? Bob or the Trust?

Not enough information. Are you saying the Trust owns the airplane, Bob is the Trustee of the Trust and Bob is also the Pilot of the Airplane? In that case, Bob gets sued in his name as Trustee of the Trust (owner liability, recovery would come from trust assets) and in his name personally as the pilot based on his negligence in piloting the airplane (recovery comes from Bob personally, or his insurance).

 

[LDJones]

So, if Bob is the Trustee and Bob is a pilot who crashes his Learjet into a schoolyard full of kids, who get's sued? Bob or the Trust?

Everybody and anybody who had anything to do with the aircraft in recent memory!

 

[asechrest]

The trust is a "person" in the eyes of the law, so ownership of the trust asset(s) is/are held by the trust itself, not the trustee. Generally, the trustee is not personally liable unless they act contrary to their fiduciary duty to the trust. Insurance on trust assets is in the name of and for the benefit of the trust.

Caveat: Free legal advice is worth every penny you pay for it! Consult a lawyer in your jurisdiction to really know your rights.

Hey, Loren, I thought you might answer. Thanks, and interesting. That's contrary to what I was reading. For example, the case here. And some guidance here. But you can't always trust the internet.

There is some interesting interplay with personal insurance policies and trusts, in that all but the most modern ISO insurance form versions are designed to insure a "natural person", leaving the potential for substantial coverage gaps if you list the trust as named insured and call it a day.

Industry guidance is often to write the policy in the name of the trustees, with the trust as additional insured. But I wonder how that actually plays out on the legal side.

 

[Fearless Tower]

Not enough information. Are you saying the Trust owns the airplane, Bob is the Trustee of the Trust and Bob is also the Pilot of the Airplane? In that case, Bob gets sued in his name as Trustee of the Trust (owner liability, recovery would come from trust assets) and in his name personally as the pilot based on his negligence in piloting the airplane (recovery comes from Bob personally, or his insurance).

Let's say Bob owns the airplane. Bob is the pilot. Bob is the Trustee and Beneficiary, but the Trust does not have ownership of the airplane.

Can the Trust be sued/have its assets taken, or just Bob and his personal assets?

 

[Henning]

I know we've got some legal geeks here, so I thought I'd throw this up.

I am trying understanding some elements trust law. My research indicates that a trust is really a legal construct that bifurcates ownership, with legal title being held by the trustees and equity title being held by the beneficiary. Further, my understanding is that the trustees may be "personally" liable and sued as individuals if suit is filed against the trust. I've seen some case law that says when you sue a trust, you actually sue the trustees.

I am trying to understand two things: which individuals or entities have insurable interest in the trust property, and of those individuals or entities, who has the most interest. Based on my reading, I think I could argue that the trustees and beneficiary all have insurable interest. (And maybe the grantor?). But it would seem that the trustees are most important. But IANAL.

I guess I am essentially asking, if you had to form a hierarchy of trust entities, from most important to insure vs. least important to insure, how would it be ordered?

(As background: I'm in a heated argument among insurance folks, with some saying only the beneficiary has insurable interest. I believe otherwise.)

Not a legal geek, but have been schooled on insurable interest as it applies in most states, and unless the trustee is also a beneficiary, or perhaps draws his income from the trustee position, I see no claim for insurable interest for the trustee. Now it may be incumbent on the trustee to ensure that the trust is insured, and the insurance companies will issue trust policies on the trustee's signature if that is what you are getting at. But for the trustee to take out a policy benefitting themselves in the event of loss of trust property, I don't think you can buy that. I actually think they may look at you with suspicion if you ask.

 

[bradg33]

Let's say Bob owns the airplane. Bob is the pilot. Bob is the Trustee and Beneficiary, but the Trust does not have ownership of the airplane.

Can the Trust be sued/have its assets taken, or just Bob and his personal assets?

Self-settled trusts (where the grantor is also the beneficiary) rarely provide any real protection. A hurdle to collection, perhaps, but not usually a roadblock.

 

[asechrest]

Not always - in some, or many, states, the trust itself is more or less a legal fiction. All of the trust's assets are held in the name of the Trustee, on behalf of the trust. So, a "trust" can't be sued directly; you have to sue the trustee, "as trustee" of the trust. So if Bob is Trustee of the Joe Smith Irrevocable Trust, you cannot sue the Joe Smith Irrevocable Trust; you MUST sue Bob, as Trustee of the Joe Smith Irrevocable Trust. As a general rule, Bob is not being sued in his individual capacity and is thus not individually liable for the trust's liabilities.

There are some exceptions, the main one coming to mind being the Massachusetts Business Trust, which actually is a legal entity in and of itself.

I don't do insurance law, so I can't speak to who might have an insurable interest in Trust property, but my gut tells me the beneficiaries would not, as they have no legal interest in the property, and the Trustee, as the title holder, would.

Thanks as well. I should definitely be mindful of differences in state trust law, I guess. This is a FL question but I've been pulling info from all over the place.

 

[Sam D]

Seems like it would matter what risks we are insuring.

 

[asechrest]

Not a legal geek, but have been schooled on insurable interest as it applies in most states, and unless the trustee is also a beneficiary, or perhaps draws his income from the trustee position, I see no claim for insurable interest for the trustee. Now it may be incumbent on the trustee to ensure that the trust is insured, and the insurance companies will issue trust policies on the trustee's signature if that is what you are getting at. But for the trustee to take out a policy benefitting themselves in the event of loss of trust property, I don't think you can buy that. I actually think they may look at you with suspicion if you ask.

Well, doesn't the trustee(s) hold legal title to the trust property, with fiduciary duty to handle the affairs of the property on behalf of the beneficiary? That would seem to confer substantial insurable interest, no? Aren't they, in effect, part owners?

 

[asechrest]

Seems like it would matter what risks we are insuring.

In the instant case, it's a condo rented-to-others (so the tenant occupant is unrelated to the trust owner and entities).

 

[Henning]

Well, doesn't the trustee(s) hold legal title to the trust property, with fiduciary duty to handle the affairs of the property on behalf of the beneficiary? That would seem to confer substantial insurable interest, no? Aren't they, in effect, part owners?

Correct, but fiduciary responsibility and insurable interest are two wholly different things. In order to have insurable interest, you will have to sustain a personal loss if there is a loss. You act as a representative of the trust, which as I said before, allows you to execute your fiduciary responsibilities to make sure the beneficiaries of the trust are made whole, but the trusty status does not allow you to declare yourself as a beneficiary of such a policy. Again, I will allow a small allowance for expected income should the trust dissolve. Not sure if you can buy that product, but it would be a legitimate claim to insurable interest.

Trustee is a special legal relationship that may or may not have beneficiary rights.

 

[midlifeflyer]

So, if Bob is the Trustee and Bob is a pilot who crashes his Learjet into a schoolyard full of kids, who get's sued? Bob or the Trust?

I think you may be missing a piece. A trust, just like a corporation LLC, etc, is a legal construct to segregate the ownership of certain assets. The earlier discussion of whether the assets are owned by the "trust" or the "trustee" is a technicality of state law, but without a practical difference to anyone but a lawyer.

In terms of this question, the important principle to remember is that a human being has liability for his or her own actions. Most folks don;t realize this but, for example, when a UPS driver runs someone over, the UPS driver is liable. He or she probably wont have to pay out of his own pocket since UPS is also liable and. more importantly will cover it, he or she is technically liable.

If the airplane owned by someone or something other than the pilot it may also have liability for the accident. But that doesn't take away the pilot's liability. If there is a legal theory of liability against a party, that party is likely to be sued. The injured party doesn't have to make a choice.

In your scenario the same person is both pilot and trustee. That doesn't change anything in terms of the liability picture for either.

Not sure if that answers your question because I'm not sure how much you already know and how much general background you need.

 

[midlifeflyer]

Thanks as well. I should definitely be mindful of differences in state trust law, I guess. This is a FL question but I've been pulling info from all over the place.

If that's the case, you want to sit down with a professional and discuss the benefits and pitfalls a trust mechanism will provide in terms of the goals you want to accomplish.

The answer isn't always about liability; there are other reasons for the use of trusts and other legal constructs.

 

[asechrest]

Correct, but fiduciary responsibility and insurable interest are two wholly different things. In order to have insurable interest, you will have to sustain a personal loss if there is a loss. You act as a representative of the trust, which as I said before, allows you to execute your fiduciary responsibilities to make sure the beneficiaries of the trust are made whole, but the trusty status does not allow you to declare yourself as a beneficiary of such a policy. Again, I will allow a small allowance for expected income should the trust dissolve. Not sure if you can buy that product, but it would be a legitimate claim to insurable interest.

Trustee is a special legal relationship that may or may not have beneficiary rights.

I am not suggesting that simple fiduciary duty confers insurable interest. But I do argue that if the trustees are the legal titleholders (owners, right?), and responsible for managing the property and assets of the trust until such time as they are transferred to the beneficiary upon dissolution of the trust, that insurable interest would seem to be relatively clear.

If the trustees fail to procure indemnification of the trust property, are they liable to the trust for their failure? Listing them as insureds under the contract of insurance doesn't mean they "benefit" from the policy if, for example, there is a total loss. Indeed, their duties -- as trustees and to the beneficiary -- would remain, right? I would assume that the total loss payout remains an asset of the trust, so the trustees don't get to pocket it and run.

 

[asechrest]

If that's the case, you want to sit down with a professional and discuss the benefits and pitfalls a trust mechanism will provide in terms of the goals you want to accomplish.

The answer isn't always about liability; there are other reasons for the use of trusts and other legal constructs.

Agreed, and I'm working on some professional connections to help me out. Just so we're clear, I'm in insurance and this is something we've been discussing in the office and also with some underwriters, and I thought I'd throw it up here on the forum since we have such a broad array of strengths around here. I was primarily interested in the legal aspect of it.

My goal is proper protection of the asset -- in this case a condo, rented to others, in the name of a personal trust -- but unfortunately I have to work within the limitations of the insurance carrier offering to indemnify. Those limitations leave me needing to understand who I must be certain to protect under a named insured status. Part of that is understanding the policy form, but part of that also seems to be understanding the legal side: who gets named in suits, who is truly responsible to be certain the property is indemnified, who do we want a total loss payout to be payable to, etc.

 

[midlifeflyer]

I am not suggesting that simple fiduciary duty confers insurable interest. But I do argue that if the trustees are the legal titleholders (owners, right?), and responsible for managing the property and assets of the trust until such time as they are transferred to the beneficiary upon dissolution of the trust, that insurable interest would seem to be relatively clear.

If the trustees fail to procure indemnification of the trust property, are they liable to the trust for their failure? Listing them as insureds under the contract of insurance doesn't mean they "benefit" from the policy if, for example, there is a total loss. Indeed, their duties -- as trustees and to the beneficiary -- would remain, right? I would assume that the total loss payout remains an asset of the trust, so the trustees don't get to pocket it and run.

You are essentially correct.

That's why I said earlier that the distinction in different states between a trust and a trustee as the "owner" of the asset is pretty much irrelevant except to lawyers and as a contractual term. It's so much easier for understanding to think in terms of the "trust" being the owner and the "trustee" being the person who handles the trust's affairs.

The trustee personally owes duties to the trust and the beneficiaries. The trustee personally has no ownership interest or insurable interest in the trust assets.

 

[midlifeflyer]

My goal is proper protection of the asset -- in this case a condo, rented to others, in the name of a personal trust -- but unfortunately I have to work within the limitations of the insurance carrier offering to indemnify. Those limitations leave me needing to understand who I must be certain to protect under a named insured status. Part of that is understanding the policy form, but part of that also seems to be understanding the legal side: who gets named in suits, who is truly responsible to be certain the property is indemnified, who do we want a total loss payout to be payable to, etc.

The "who" is is going to be based on the legal construct. And that in turn may depend on more details than what people are called. That trust was most likely created by an attorney with specific asset protection and estate planning goals in mind. That's where I would go first.

Context - I am by history a business litigator with a strong business transactional background, particularly in banking. I've been engaged in litigation involving trusts. For a time I was in-house with a banking software company and responsible for our trust lending product as personal trusts grew in popularity as an estate planning technique. That's background for this: When I deal with the creation of a trust and determining how things such as ownership, insurance, etc should be set up, I won't touch it. I don't know enough about it and refer it to the real experts.

 

[TedR3]

Interesting that answers are all over the place in this thread, but:

- The laws governing trusts vary from state to state.

- Common law trusts are not separate legal entities which can sue or be sued. The trustees are the proper parties. Trusts do not own title to property, trustees do. This is a distinction that is often ignored, but sometimes with fatal results (See e.g. http://www.behblaw.com/News/Go-After-The-Trustee-Not-The-Trust-Trust-Me.shtml)

- Trustees are generally not personally liable to third parties (See e.g. Uniform Trust Code Sec. 1010).

- Trustees (and Executors) regularly buy property insurance in their own name without any involvement (or naming) of the trust beneficiaries.

- A trustee may be liable to beneficiaries for failing to obtain appropriate property and liability insurance.

If I were you, I'd find another insurance broker.

 

[asechrest]

The "who" is is going to be based on the legal construct. And that in turn may depend on more details than what people are called. That trust was most likely created by an attorney with specific asset protection and estate planning goals in mind. That's where I would go first.

Context - I am by history a business litigator with a strong business transactional background, particularly in banking. I've been engaged in litigation involving trusts. For a time I was in-house with a banking software company and responsible for our trust lending product as personal trusts grew in popularity as an estate planning technique. That's background for this: When I deal with the creation of a trust and determining how things such as ownership, insurance, etc should be set up, I won't touch it. I don't know enough about it and refer it to the real experts.

Thanks for the comments. I'll chew on that a while.

 

[asechrest]

Interesting that answers are all over the place in this thread, but:

- The laws governing trusts vary from state to state.

- Common law trusts are not separate legal entities which can sue or be sued. The trustees are the proper parties. Trusts do not own title to property, trustees do. This is a distinction that is often ignored, but sometimes with fatal results (See e.g. http://www.behblaw.com/News/Go-After-The-Trustee-Not-The-Trust-Trust-Me.shtml)

- Trustees are generally not personally liable to third parties (See e.g. Uniform Trust Code Sec. 1010).

- Trustees (and Executors) regularly buy property insurance in their own name without any involvement (or naming) of the trust beneficiaries.

- A trustee may be liable to beneficiaries for failing to obtain appropriate property and liability insurance.

If I were you, I'd find another insurance broker.

Thanks, Ted. I am the insurance broker.

Your comments fairly-neatly summarize what I've been able to gather from reading (IANAL). I've been fighting with colleagues and an underwriter on this. What recently spurred my interest in digging into the legal aspect is the underwriter insisting that the beneficiary or grantor -- not the trustees -- are the parties with insurable interest.

PS - And thanks for that link. I'd actually read that case (I linked it way above), and that's part of how I formulated my thinking. I just need to draw on some professional contacts to understand whether that holds true for FL.

 

[Henning]

Thanks, Ted. I am the insurance broker.

Your comments fairly-neatly summarize what I've been able to gather from reading (IANAL). I've been fighting with colleagues and an underwriter on this. What recently spurred my interest in digging into the legal aspect is the underwriter insisting that the beneficiary or grantor -- not the trustees -- are the parties with insurable interest.

Yeah, I don't see how to argue with the underwriter on this. Have you dealt with a different underwriter who allowed this relationship? The test is if the loss occurs, what are you out? The trustee is out a job unless he is also a beneficiary.

You could probably sell the trustee an E&O policy though.

 

[asechrest]

Yeah, I don't see how to argue with the underwriter on this. Have you dealt with a different underwriter who allowed this relationship? The test is if the loss occurs, what are you out? The trustee is out a job unless he is also a beneficiary.

Most of my carriers direct me to list trustee as primary insured, and list the trust (and perhaps others) as additional insured (which is a limited insured status). So this underwriter's assertion is unusual, thus my research and debate.

Insurable interest is certainly an important requirement to avoid morale hazard, but you haven't convinced me that the trustee has no insurable interest. The trustee has substantial interest in preservation of the property because they're legally obligated to do so as trustee. Right?

 

[TedR3]

Thanks, Ted. I am the insurance broker.

Oops. LOL.

There is an ISO HO endorsement that handles this issue when someone transfers title to their house to their "living trust", but that doesn't sound like it fits your situation.

Maybe talk to an active t/e attorney there and find out who he or she uses for insurance.

Finally, don't forget liability coverage for the trustees. You don't want want trust assets exposed to slip and fall claims.

 

[asechrest]

Oops. LOL.

There is an ISO HO endorsement that handles this issue when someone transfers title to their house to their "living trust", but that doesn't sound like it fits your situation.

Maybe talk to an active t/e attorney there and find out who he or she uses for insurance.

Finally, don't forget liability coverage for the trustees. You don't want want trust assets exposed to slip and fall claims.

Thank you, sir!

The modern version of the ISO homeowner forms and endorsements have a better handle on insuring trusts (e.g. HO 06 15 TRUST ENDORSEMENT). Unfortunately, no one seems to use those forms and endorsements yet.

 

[Henning]

Most of my carriers direct me to list trustee as primary insured, and list the trust (and perhaps others) as additional insured (which is a limited insured status). So this underwriter's assertion is unusual, thus my research and debate.

Insurable interest is certainly an important requirement to avoid morale hazard, but you haven't convinced me that the trustee has no insurable interest. The trustee has substantial interest in preservation of the property because they're legally obligated to do so as trustee. Right?

That I see covered by an E&O/Professional Liability policy myself, that covers any losses incurred to the beneficiaries should the Trustee fail at duties. Their only direct interest in sustaining the trust comes from a liability standpoint as the stand to lose nothing from the loss of trust equity itself. If there is a house in the trust and the house burns, the trustee has no right to pocket any of the insurance settlement. I can see the other side of the argument in giving them the insurance check since their relationship status as trustee defines what they may do with it, but it really seems like an odd way for an insurance company to handle it.

 

[midlifeflyer]

Yeah, I don't see how to argue with the underwriter on this. Have you dealt with a different underwriter who allowed this relationship? The test is if the loss occurs, what are you out? The trustee is out a job unless he is also a beneficiary.

You could probably sell the trustee an E&O policy though.

It is still going to depend. If, as a hypothetical, the trust owns the real estate and other assets, the trust document may well provide for the distribution of sale and insurance proceeds. In turn, if the state titles trust-owned property as "John Jones, as trustee under the Terrific Trust," "John Jones as trustee" (not John Jones as an individual human being)would likely be the proper primary insured party. In fact, he may be the only person described in a public record of any kind.

 

[Henning]

It is still going to depend. If, as a hypothetical, the trust owns the real estate and other assets, the trust document may well provide for the distribution of sale and insurance proceeds. In turn, if the state titles trust-owned property as "John Jones, as trustee under the Terrific Trust," "John Jones as trustee" (not John Jones as an individual human being)would likely be the proper primary insured party. In fact, he may be the only person described in a public record of any kind.

I can see it work that way, but as you say, sold the the trustee entity, not the trustee personally.