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Transferring wealth: baby boomer clients should know how to bequeath an estate without leaving insurance protection behind.

As the baby boomer generation continues to move toward retirement, many of its members have begun to plan for the transfer of their wealth to their children, relatives and other beneficiaries.

Seeking wealth transfer techniques that provide the most estate protection and least amount of taxes, many have found entities such as trusts and limited liability corporations to be attractive alternatives to standard wills--but they may not be aware of how assets held by these entities need to be insured.

According to the Internal Revenue Service, 3.7 million trusts existed in 2004; that number is expected to grow to 3.9 million by 2008. Between 2003 and 2004 alone, the value of the assets held in trusts rose more than 19%, to $85 billion.

Establishing a trust or an LLC to plan for wealth transfer allows its creator to delegate the rules for how those assets are handled, both during life and after his or her death. This enables the creator to ensure that these assets will be protected from creditors and that beneficiaries will be at least temporarily shielded from an undue estate tax burden.

Several types of trusts and LLCs each can hold virtually any kind of asset: from real estate to liquid assets, even art and antiques. Some people who create these entities, however, fall to realize that when they transfer ownership of assets into a trust or an LLC, the personal insurance they purchased for those assets no longer covers them. While purchasing insurance solely in the name of the entity appears to solve this coverage gap, this may leave the transferor vulnerable to loss.

When an individual owns a home, the homeowners policy covers his or her property interests in the home, contents and liability arising out of ownership and occupation of the home. When ownership of a home is transferred to a trust or LLC, the trust or LLC needs insurance to cover its ownership interests, but any residual interests of the transferor, such as personal possessions, also need to remain insured. In many cases, the home, but not its contents, will be put into trust. In addition, if the transferor continues to live in the home, a liability exposure to that individual still exists.

There are two principal ways to make sure both the transferor and the entity are properly insured for their respective interests. One way is for the entity to purchase a homeowners policy for the house and for the transferor living in the house to purchase a separate homeowners tenants policy. Each policy could cover the respective property interests of the entity and the transferor in the event of a property loss on the premises. This coverage strategy could also help protect each party in the event of a property-related liability claim.

Agents and brokers also can suggest that clients recognize the trust's or LLC's interest under their existing homeowners policies. The entity could be added to the existing policy though an endorsement, which would provide appropriate insurance protection for both the transferor as occupant of the house and the trust or LLC as owner under the same policy. Under this approach, the individual still may be listed as the named insured on the policy, and the entity is listed as an additional interest. Many insurance carriers will add such an endorsement to an existing policy at no additional cost.

Other assets such as art and antiques usually can be protected if the entity is the named insured. But if ownership of the collection is split between the entity and the transferor, agents and brokers can encourage clients to consider separate policies.

Some trusts and LLCs are used not only to hold assets, but also to conduct a variety of business transactions that may involve acquiring or liquidating assets. Agents and brokers should recommend that this form of trust or LLC be carefully reviewed by a qualified underwriter to determine whether or not it creates commercial exposures. If it does, agents and brokers can help their clients set up a commercial insurance program, including necessary errors and omissions and general liability insurance.

Agents and brokers who take the time to help ensure that their clients' transferred assets are adequately covered can demonstrate their risk management expertise. They also can assume their rightful place next to other client advisers in the wealth management arena.

Andrew McElwee, a Best's Review columnist, is executive vice president of Chubb & Son and chief operating officer of Chubb Personal Insurance, Whitehouse Station, NJ. He can be reached at
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Title Annotation:Property/Casualty: Loss/Risk Management Insight
Author:McElwee, Andrew
Publication:Best's Review
Geographic Code:1USA
Date:Feb 1, 2007
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