The comments come from Lynn Rasmussen, who is senior vice president and practice leader at Lockton, the private insurance brokerage.

The following commentary about the interplay of limited liability corporations and trusts - and how specific tax and estate planning issues can arise when, for example, there are personal injury cases, is very timely. While divorce, family breakups and other specific events can grab much of the limelight, it is a sad fact that accidents and their aftermath do not always feature as prominently in converations. Perhaps that's unsurprising given the topic. But as far as wealth advisors are concerned, it is an issue that they should keep in mind, and ensure that available tools are fit for purpose to protect clients and their families. There are, meanwhile, other risks and threats that families and their advisors should consider around trusts and LLCs.

The comments come from Lynn Rasmussen, who is senior vice president and practice leader at Lockton, the private insurance brokerage that caters for clients in the US and overseas, and which operates in areas such as collectibles, farmland, domestic staff, cyber-security and social media, travel, family offices and private foundations.

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A family hosts a wedding at their home in the Hamptons. The champagne flows freely and a guest over consumes. Later that night, they cause a car accident resulting in severe injuries to a surgical resident who will never be able to perform surgery again.  The surgical student sues the family for the injuries, lost future earnings, and holds the family responsible for over serving the guest.

What will the family have to pay? The cost will depend on their risk management strategies and liability insurance policies.

One strategy is to create separation between individuals and their assets through a trust or limited liability corporation (LLC). The advantages can include privacy protection, lower taxes, flexibility, family legacy and asset protection.  Real estate, collectibles, yachts or other tangible assets can be placed in an LLC or trust. The trust and estate attorney, wealth advisor, accountant, and insurance professional each have a role in successfully executing this strategy.  

When successfully structuring an LLC or trust, property and casualty insurance shouldn’t be overlooked. A complex organization of layered legal entities may require a more sophisticated set of policies to protect all parties. The legal ownership of tangible assets must align properly with the insurance policies for coverage to respond as intended. If this step is overlooked and a claim occurs, the consequences can be costly.  

What else can the family or trustees be held responsible for?

-- Dog bites are the single leading cause of liability claims. Under most circumstances, a dog bite claim is covered by personal liability and excess liability policies but only if the party sued is the individual, trust or LLC named on the policy.  These policies may occasionally cover liability for horses and other livestock but again, only if owned by the individual or legal entity named on the responding policy.

-- Yachts and private aircraft are almost always owned by an LLC or a trust even if they are not chartered.  Due to their high-risk nature they are usually excluded from coverage under a personal liability or umbrella policy. They require complex policies to protect the asset and the legal liability arising from their use.

-- Trustees are sometimes in situations where they must make quick decisions with little prior experience or training.  Claims against trustees can include errors, mismanagement of assets, unfair distributions, conflict of interest and failure to follow the terms of the trust.  Lawsuits against them come from charities, government agencies, creditors or beneficiaries and can be filed against them personally.  Trustees are not employees, so they are not protected by the legal entity.
There are specific insurance policies to consider for the protection of the trustees.    

For an insurance specialist to structure the insurance portfolio appropriately, they should ask these questions:

1.    Are there any other assets in the trust or LLC?
2.    Are there layers of trusts and LLCs?  If so, what is contained within that structure?
3.    What’s the purpose of creating the entity?
4.    Are there any employees of the entity?  What are their responsibilities and who pays them? Who directs them?
5.    Is there a revenue-generating component to the entity?  If so, what is it and how much revenue does it generate annually?
6.    Who are the trustees?  
7.    Who makes the decisions on behalf of the trust?
8.    Who will pay the insurance premiums or cash claim checks?  The individual or the legal entity?
9.    Is there a written lease agreement between the individual and the trust or LLC when the asset is real estate?

The answers are crucial to ensuring that individuals and their trusts or LLCs are properly protected by the insurance policies in their portfolio.  A consultative insurance professional will ask these questions then coordinate the policies accordingly.  Because insurance policies are complex legal contracts they require the oversight of an experienced professional.