Do I Need Umbrella Insurance If I Have a Trust?

Having a trust can provide many benefits, such as avoiding probate and protecting assets. However, a common question that comes up is whether you still need umbrella insurance if you have a trust set up. The short answer is yes, umbrella insurance is still recommended even if you have a trust.

What is Umbrella Insurance?

Umbrella insurance provides extra liability coverage above and beyond what your other insurance policies provide. For example, your auto and home insurance have liability limits – usually around $300,000 to $500,000. If you are found legally liable for damages higher than those limits, you would normally have to pay the excess amounts out of pocket.

Umbrella insurance kicks in to cover those excess amounts, providing an extra layer of protection. It typically provides an additional $1 million to $5 million (or even more) in liability coverage.

So umbrella insurance protects your assets and future earnings by covering liabilities that exceed your other policies’ limits. This provides peace of mind that you won’t lose everything if you are sued for a large amount.

Why You Still Need Umbrella Insurance with a Trust

Even if you have assets protected in a trust, umbrella insurance is still very beneficial to have. Here are some key reasons:

1. protects non-trust assets

While a trust can protect the assets transfered into it, you likely have many non-trust assets too. Things like bank accounts, investments, retirement accounts, and personal property are probably not held in the trust.

Umbrella insurance helps protect these non-trust assets if you are sued. Without it, non-trust assets could be at risk if there is a liability judgement above your other policy limits.

2. Covers more than just assets

Umbrella insurance provides protection beyond just assets – it also covers your future earnings potential. A large judgement could potentially garnish your wages for years to come. Umbrella insurance provides peace of mind that your future income stream is protected.

3. Protects trust assets too

While assets in an irrevocable trust are generally protected from creditors, umbrella insurance provides an extra layer of protection for trust assets too. It reduces the risk of the trust being sued at all, by covering liabilities from the start.

4. Covers more exposures

Umbrella insurance provides liability protection for more than just auto and home incidents. It can also cover things like libel/defamation, personal injury, recreational activities, and more. The broader coverage protects from a wider range of lawsuits.

5. Often inexpensive

Umbrella insurance premiums are very reasonable in relation to the amount of extra coverage provided. Often just a few hundred dollars a year can provide an extra $1 million in coverage. That’s inexpensive peace of mind.

Umbrella Insurance Covers Risks a Trust Does Not

There are certain risks and liabilities that umbrella insurance covers that a trust does not:

• Future earnings potential – umbrella insurance protects future wages from garnishment, while a trust only protects existing assets transferred into it.

• Reputational damage – The broader coverage of umbrella insurance can cover claims of libel, defamation, invasion of privacy, etc. that can harm reputation.

• Wage replacement – If injured and unable to work, umbrella insurance can cover lost wages.

• Non-trust assets – Assets not transferred into the trust are at risk without umbrella insurance.

• Excess health costs – If injured, umbrella insurance covers health costs above regular health insurance.

• Costs of a legal defense – Umbrella insurance covers legal defense costs, win or lose.

So while a trust helps protect existing assets, umbrella coverage provides much broader protections.

Umbrella vs Trust: Key Differences

Here is a quick overview of some of the key differences between umbrella insurance and a trust:

As you can see, umbrella and trusts accomplish different things. An umbrella policy covers liabilities, while a trust protects existing assets placed into it. Using both together provides comprehensive protection.

Common Coverage Limits for Umbrella Insurance

Umbrella insurance policies provide a range of additional liability coverage limits to choose from. Some common levels include:

• $1 million
• $2 million
• $3 million
• $5 million
• $10 million

Coverage limits of $1 to $5 million are the most common for personal umbrella coverage. Higher limits are usually available but for a higher premium.

When choosing coverage limits, consider your overall asset picture. If you have significant assets that could be at risk in a lawsuit, choose a higher umbrella limit for better protection.

Umbrella Requirements

To qualify for personal umbrella insurance, you generally need to have the following minimum underlying coverages already in place:

• $300,000 in liability coverage for vehicles
• $300,000 in liability coverage for your home/properties
• $300,000 in watercraft liability (if applicable)

These requirements ensure there is base liability coverage, that the umbrella policy sits on top of. It fills the liability gaps above those policies.

Finding the Best Umbrella Insurance

If you decide umbrella coverage is right for your situation, here are some tips for finding a good policy:

• Review the coverage exclusions and restrictions carefully. Look for a policy with the fewest gaps.

• Look for coverage for legal defense fees. Policies that cover defense costs provide extra protection.

• Look for worldwide coverage. This covers any incidents that happen anywhere in the world.

• Compare quotes from multiple insurers. Coverage and pricing can vary significantly.

• Consider adding excess limits even above the umbrella policy for extra protection.

• Check the insurer’s financial strength rating to ensure they can pay claims.

The Bottom Line

Having a trust can certainly provide strong protection for the assets placed into it. However, umbrella insurance is still recommended even if you have a trust. It delivers valuable extra protections for liabilities and non-trust assets. For comprehensive protection, many financial and legal experts recommend using both an irrevocable trust along with ample umbrella insurance coverage.

Frequently Asked Questions

Does umbrella insurance protect trust assets?

Umbrella insurance can provide additional protection for assets held within an irrevocable trust. While trust assets have creditor protection, the broader liability coverage of an umbrella policy provides extra peace of mind.

Can umbrella insurance be substituted for a trust?

No, umbrella insurance is not an adequate replacement for an irrevocable trust. It does not directly protect trust assets like a formal trust does. It also does not provide protection for future generations like a trust can.

Does my home or auto insurance cover liabilities from my trust assets?

No, standard home and auto policies will not cover any liabilities specifically arising from assets held within your trust. To get protection for trust assets, it is important to also have an umbrella policy.

Does umbrella insurance protect me if I’m sued personally?

Yes, your umbrella policy will cover judgements against you personally above the limits of your other insurance policies. Both non-trust personal assets and future wages will be protected by the umbrella coverage.

Do I need a trust if I have umbrella insurance?

You can certainly benefit from having both a trust and umbrella insurance. The trust directly protects assets transferred into it, while the umbrella provides additional liability coverage above your other policies. Using both together provides full protection.

Conclusion

The right insurance coverages and legal structures are important when protecting your hard-earned assets. Consult with qualified financial and legal advisors to determine what strategies are right for your unique situation. With the proper umbrella insurance and irrevocable trust, you can gain peace of mind knowing both your assets and future earnings are protected.