Surety Bonds and Trusts – Underwriting Considerations

This is a picture of a financial institution in blue and gray with dollar signs and the words, "Trust Fund and Surety Bond Underwriting" on it

Understanding how surety bond underwriters look at trusts can have a significant impact on Bond Principals and the surety bond capacity they can obtain. Here is more information about how underwriters view surety bonds and trusts.

What are Trusts?

A trust is a legal, fiduciary arrangement where assets are held by a third party for the benefit of other parties known as the beneficiary or beneficiaries. Trusts can be an important consideration in proper succession planning and estate planning. Trusts can hold many different types of assets including cash, marketable securities, life insurance, real property, etc.

There are also many different types of trusts. These can include marital trusts, generation skipping trusts, charitable trusts, life insurance trusts, etc. Two broad categories of trusts include Revocable Trusts and Irrevocable Trusts.

A Revocable Trust is one that can be changed during your lifetime. It allows adjustments to be made during one’s lifetime. A Revocable Trust can have some protection against creditors.

An Irrevocable Trust is the opposite. Once established, the rules are set. The benefit of this type of trust is that it often provides strong protection against creditors.

Trusts in Surety Bond Underwriting

Trusts can be a benefit in underwriting surety bonds. Trusts can provide a way to avoid probate and even potentially hold the life insurance or assets for the continuity of the company or the transition of that company. Trust can also potentially hinder surety bond underwriters, however. Here are some key underwriting considerations on how trusts can affect surety bonding.

Indemnity and Trusts

One of the key elements for extending surety bond credit is the Principle of Indemnity. That means that the surety bond company expects to be reimbursed by the Principal and indemnitors if they pay a valid loss. However, if a majority of a Principal’s assets are held in a trust, it may be difficult or impossible for the surety bond company to get reimbursed from that indemnitor. Therefore, one of the key considerations for providing surety bonds for an indemnitor with a trust is whether that trust can indemnify. This depends on how the trust was set up. If you have a trust, you should expect the surety bond underwriter to request a copy of the trust documents to see whether indemnity is available.

Personal indemnity is often required by surety bond companies when a person and/or their spouse owns 15% or more of a company. There are exceptions. Companies that have very strong balance sheets and track records, may seek a waiver of personal indemnity but in most cases, it will be required. When personal indemnity exists, expect the surety bond company to require the indemnity of that stockholder’s trust along with any trust owned by a spouse. This often brings up objections as it often contradicts the reason the trust was set up. Keep in mind that surety bonds are a credit product though. If a surety bond company cannot get the indemnity of the trust, they also cannot count those assets and the Principal may not qualify for surety bonding. Worse still, an important part of surety bond underwriting is Character. It is part of the 3 C’s which you can read about here. Part of character underwriting is the belief that a Principal will reimburse the surety bond company if a loss occurs. The unwillingness to include one’s trust is often a signal to the surety bond company that the Principal will not try to reimburse after a claim and may try to instead shelter their assets. This might cause some surety bond companies to decline an account, even if other aspects look strong.


Trusts and Surety Bonds. This is a picture of a person signing a document with a red text box saying indemnity is key to writing trusts on it.

Consider Limited Indemnity of the Trust

If your trust is strong enough, consider limiting the indemnity to a certain dollar figure to support your surety bond capacity. For example, say your trust holds $3 million in assets but your surety bond program only needs $1 million. Your surety bond underwriter may consider limiting the trust’s maximum exposure to $1 million of indemnity.

No Indemnity of the Trust

What if your trust is contractually not allowed to sign the indemnity agreement? Many times, the way a trust is structured, they are not allowed to sign these documents. In these cases, the surety bond company will have to rely only on the assets outside of the trust when deciding whether to extend surety bond credit.

Consider Your Lending Relationship

Surety Bond companies always want to be on the same level of indemnity as a Principal’s bank or lender. This means that if your trust is included on your other loans, the surety bond company will want it included in their indemnity as well. At times, a Principal will ask that the trust be excluded from the surety bond company’s indemnity, but this is difficult if the trust is being used as collateral for other credit purposes.

Leave Adequate Resources in the Company

The best strategy for many surety bond users is to hold adequate financial assets within the company to qualify for surety bond credit outside of your personal trust. By maintaining sufficient working capital and net worth in the company, personal assets, including trusts may be excluded.

Trusts can be a valuable tool for surety bond principals when set up correctly. When putting together your trust, it is important to consider the implications a trust may have on your surety bond capacity and your ability to get surety bonds. We encourage principals to talk to their surety bond expert before finalizing any documents that hurt your ability to get bonding. MG Surety Bonds has a team of surety bond experts available to answer your questions. Contact us anytime.