Irrevocable Trust vs. Umbrella Insurance Policy:

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A prospective client had very active toddler that was involved in a two-toddler pile-up while in a waiting area. His child, who was most likely to blame for the tangle mass of toddlers on the floor, came out unscathed. The other toddler, however, received a minor injury that, at first, appeared much worse. His first thought was that kids will be kids, but then it struck him, what if the injury wasn’t minor. Although there was nothing out of the ordinary about the children playing, a jury would certainly award the family of an injured toddler a fair to extraordinary amount of money. Where would he get that money? What happens when his kids are older and can accidently inflict more damage? What happens when they start to drive?
Golden shield with gold coins representing the UltraTrust irrevocable trust plan.

How do Umbrella Insurance Policies Work?

Umbrella policies are marketed for this very situation, but do they work? An umbrella policy covers above and beyond the other policies that a person or family purchases. In addition an umbrella policy covers other events, such as the one described above, other insurance policies don’t cover. “Umbrella policies can provide a feeling of security, but they are not without their downside. You may get more litigation than you bargained for,” warns Rocco Beatrice, Managing Executive of Estate Street Partners, a national estate planning company.

The Problem with Umbrella Insurance Policies:

The problem with umbrella policies and insurance policies in general is that the insurance may invite the very lawsuits they mean to protect against. When an injured person approaches a lawyer, the lawyer listens to the case to see if the case contains a kernel of merit. If it does, the very next thing a lawyer will determine is if he can get paid. Most lawyers in lawsuits get paid a commission based on the settlement or judgment amount. If the person potentially being sued is poor, meaning they have no assets, the lawyer will deem them “collection proof” and ask that the injured party pay a hefty retainer to take the case. The injured party may not have the funds or may not want to spend the money if there is no guarantee to collect something in the end.
On the other hand, if the lawyer discovers a two million dollar insurance policy and thinks he or she can settle it or get a judgment, the lawyer will gladly take the case on a contingency. That large insurance policy may look like a pot of gold to the lawyer causing them to chase it in the hopes of getting a big return on their efforts. Even if the case is frivolous, the lawyer knows he may be able to get a quick settlement, take his cut and go home happy.

The Benefits of the Irrevocable Trust vs the Umbrella Insurance Policy:

The irrevocable trust solves the greedy lawyer problem. “An irrevocable trust, when done correctly, can not only insulate one’s wealth from an outside attack, but can prevent the attack in the first place and, as a bonus, protect and distribute your wealth to future generations estate tax and probate free,” exclaims Mr. Beatrice. With an irrevocable trust, wealth is transferred into the trust and out of an individual’s estate. This means that the individual does not own any assets in the trust. Those assets are property of the trust and managed by a trustee. When the greedy lawyer looks at the potential defendant’s estate, the lawyer determines that they don’t own anything and probably will not take the case because even if they will win the case, they aren’t going to easily collect.
“The irrevocable trust deters frivolous lawsuits. No lawyer wants to work for free. Even if they take the case and win, they can’t collect, because the trust owns the assets. It’s like trying to collect a debt from your neighbor that is owed to you by your brother. You just can’t collect,” explains Mr. Beatrice. The problems some have with irrevocable trusts are associated with control. Some people may not like the trustee controlling their assets, but most irrevocable trusts don’t affect the day-to-day life person transferring their assets. They get up in the morning, do the same things they usually do, but their assets are safe.

Irrevocable Trust Must be Drafted by Someone with Years of Experience:

“Irrevocable trusts are wonderful for all the things that they do, but they don’t work if they are not drafted in specific ways for specific purposes. There are thousands of cases where inexperienced lawyers and estate planners have drafted poorly written trusts, given bad advice, or did not follow up after the trust was enacted. To utilize the powerful protection benefits of an irrevocable trust, it is best to go to a person or organization with years of experience and a proven track record,” warns Mr. Beatrice.
An umbrella policy can protect assets, but doesn’t stop the underlying lawsuit and may actually encourage it. “The time and stress involved in a having to negotiate, testify, answer interrogatories, produce documents and just generally thinking about a lawsuits isn’t worth it to me,” reveals Mr. Beatrice. “A good, solid and proven irrevocable trust, such as the Ultra Trust® gives peace of mind, deters lawsuits and provides for family and future generations.”
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