Don’t they grow up fast? Once it was “Daddy, I want that dollhouse” and “Mommy, can I have a new bike?” Now it’s, “Dad, how about a convertible?” “Mom, I really need that watch for work,” and “Thanks so much for the condo, you guys!”
One of the benefits of success is the ability to help and support one’s children, whatever their ages. But when parents— especially those of substantial means— buy expensive gifts for their progeny, they must also consider the risk and insurance implications. Otherwise, it’s the parents, and not the child, who may find themselves either liable or sued.
For example, say a parent gifts their 16-year-old a new car and soon after the child gets into an auto accident. If there is another person involved, and they engage a personal injury lawyer, one of the first things that attorney will do is figure out who has the deepest pockets. Any resulting lawsuit may well target the assets of the parents.
There are a host of actions to help manage the risks and liability associated with big purchases for children. Here, are some important tips:
1. Make sure everyone who owns the property is on the insurance. Look carefully at the title or deed to any property in the family to determine who is the legal owner. Everyone listed should also be named in the insurance. This issue typically arises when parents co-sign loans to help children buy cars or homes. Parents often assume that the children can and will secure their own insurance, but that leaves parents vulnerable to lawsuits. Any personal injury lawyer worth their salt will go after the connection with the most significant means, rather than their child.
2. Rather than giving your children real estate, consider giving them an LLC that owns real estate. There are many tax and estate planning reasons why you should consider creating an LLC to hold real estate meant for children. Add insurance to that list of benefits, as the corporate structure can shield parents from liability.
3. Don’t skimp on coverage. When children buy their own auto or homeowner coverage, we often find that they choose the cheapest options. This is generally not the best approach when the family has significant assets to protect. In particular, one should consider supplement liability coverage with an umbrella policy. Don’t make the mistake made by Terry Bollea, aka Hulk Hogan. He bought just $250,000 in liability insurance for his son’s car, and when the young man had an accident—leaving one passenger in a coma—Bollea was on the hook for the cost and ultimately agreed to an undisclosed settlement.
4. Leverage family buying power to reduce premiums. With insurance, as with so many other products, better customers get better deals. Accordingly, it will probably benefit children to shop for insurance using the broker that handles the rest of the family’s coverage. The differences, in fact, can be sizable.
5. Put “insurance” on any freshman year college to-do list. So many things run through parents’ minds as they prepare to send their children off to college. Unfortunately, they often forget to think about insurance coverage. Students living off campus probably need renters’ insurance. Parents’ homeowners policies typically only cover students living in official dormitories. It may also be wise to keep students on the family auto insurance—even if they are not taking a car to school. That way they’re covered if they drive a friend’s car (and also when they are home on vacation). Auto insurance for teenagers can be expensive, but there are often discounts available for students attending college more than 100 miles from home.
This is just a sampling of the issues that may arise, which is why we are always happy to discuss any specific purchases or concerns with you. It’s generally a simple matter to identify the exposures created by gifts of high value or potential risk, and very much worth the time it takes minimize them.