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FDIC Federal Register Citations

[Federal Register: September 30, 2008 (Volume 73, Number 190)]
[Rules and Regulations]              
[Page 56706-56712]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr30se08-2]                        

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 330

RIN 3064-AD33

Deposit Insurance Regulations; Revocable Trust Accounts

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Interim rule with request for comments.

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SUMMARY: The FDIC is adopting an interim rule to simplify and modernize
its deposit insurance rules for revocable trust accounts. The FDIC's
main goal in implementing these revisions is to make the rules easier
to understand and apply, without decreasing coverage currently
available for revocable trust account owners. The FDIC believes that
the interim rule will result in faster deposit insurance determinations
after depository institution closings and will help improve public
confidence in the banking system. The interim rule eliminates the
concept of qualifying beneficiaries. Also, for account owners with
revocable trust accounts totaling no more than $500,000, coverage will
be determined without regard to the beneficial interest of each
beneficiary in the trust.
    Under the new rules, a trust account owner with up to five
different beneficiaries named in all his or her revocable trust
accounts at one FDIC-insured institution will be insured up to $100,000
per beneficiary. Revocable trust account owners with more than $500,000
and more than five different beneficiaries named in the trust(s) will
be insured for the greater of either: $500,000 or the aggregate amount
of all the beneficiaries' interests in the trust(s), limited to
$100,000 per beneficiary.

DATES: The effective date of the interim rule is September 26, 2008.
Written comments must be received by the FDIC not later than December
1, 2008.

ADDRESSES: You may submit comments by any of the following methods:
     Agency Web Site: http://www.fdic.gov/regulations/laws/federal.
Follow instructions for submitting comments on the Agency Web
Site.
     E-mail: Comments@FDIC.gov. Include ``Revocable Trust
Accounts'' in the subject line of the message.
     Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street, NW.,
Washington, DC 20429.
     Hand Delivery/Courier: Guard station at the rear of the
550 17th Street Building (located on F Street) on business days between
7 a.m. and 5 p.m. (EST).
     Federal eRulemaking Portal: http://www.regulations.gov.
Follow the instructions for submitting comments.
    Public Inspection: All comments received will be posted without
change to http://www.fdic.gov/regulations/laws/federal including any
personal information provided. Paper copies of public comments may be
ordered from the Public Information Center by telephone at (877) 275-
3342 or (703) 562-2200.

FOR FURTHER INFORMATION CONTACT: Joseph A. DiNuzzo, Counsel, Legal
Division (202) 898-7349; Christopher Hencke, Counsel, Legal Division
(202) 898-8839; James V. Deveney, Section Chief, Deposit Insurance
Section, Division of Supervision and Compliance (202) 898-6687; or
Kathleen G. Nagle, Associate Director, Division of Supervision and
Consumer Protection (202) 898-6541, Federal Deposit Insurance
Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    One of the FDIC's fundamental goals is to ensure that depositors
and insured depository institution employees understand the FDIC's
deposit insurance rules. That goal is essential in carrying out the
FDIC's combined mission of helping to maintain public confidence and
stability in the United States banking system and protecting insured
depositors.
    Despite the FDIC's efforts to simplify deposit insurance rules in
recent years, there is still significant public and industry confusion
about the insurance coverage of revocable trust accounts--particularly
living trust accounts, one of the two types of revocable trust
accounts. This continuing confusion about the insurance coverage of
revocable trust accounts is evidenced by the tens of thousands of
deposit insurance inquiries the FDIC has received following recent
depository institution failures.

Current Rules for Revocable Trust Accounts

    There are two types of revocable trust accounts insured under the
FDIC's coverage rules: Informal trust accounts and formal trust
accounts. Informal trust accounts are comprised simply of a signature
card on which the owner designates the beneficiaries to whom the funds
in the account will pass upon the owner's death. These are the most
common type of revocable trust accounts and generally are referred to
as ``payable-on-death'' (``POD'') accounts or in-trust-for (``ITF'')
accounts or Totten Trust accounts. For purposes of this rulemaking, we
will refer to all informal trust accounts as POD accounts.
    The other type of revocable trust accounts are accounts established
in connection with formal revocable trusts. Formal revocable trusts are
trusts created for estate planning purposes. They are often referred to
as: living trusts, family trusts, marital trusts, survivor's trusts,
by-pass trusts, generation-skipping trusts, AB trusts or special needs
trusts. For purposes of this rulemaking, we will refer to all formal
revocable trusts as living trusts. Like an informal revocable trust, a
living trust is a trust created by an owner (also known as a grantor or
settlor) over which the owner retains control during his or her
lifetime. Upon the owner's death, the trust generally becomes
irrevocable. A living trust is an increasingly popular estate planning
tool. Like a POD account, a deposit account held in connection with a
living trust account at an FDIC-insured institution is insured under
the FDIC's coverage rules for revocable trust accounts.
    The FDIC's rules provide that all revocable trust accounts (both
POD accounts and living trust accounts) are insured up to $100,000 per
``qualifying beneficiary'' designated by the owner of the account.\1\
If there are multiple owners of a revocable trust account, coverage is
available separately for each owner, per qualifying beneficiary as to
each owner. Qualifying beneficiaries are defined as the owner's spouse,
children, grandchildren, parents and siblings.\2\
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    \1\ 12 CFR 330.10.
    \2\ Id. at 330.10(a).
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    The per-qualifying beneficiary coverage available on revocable
trust accounts is separate from the insurance coverage afforded to
depositors in

[[Page 56707]]

connection with other accounts they own in other ownership capacities
at the same insured institution. That means, for example, if an
individual has at the same insured depository institution a single-
ownership account with a balance of $100,000 and a POD account (naming
at least one qualifying beneficiary) with a balance of $100,000, both
accounts would be insured separately for a combined coverage amount of
$200,000.
    Under our current rules, separate, per-beneficiary insurance
coverage is available for revocable trust accounts only if the account
satisfies certain requirements. First, the title of the account must
include a term such as POD or ITF or family trust (or similar
expression or acronym), evidencing an intent that the funds shall
belong to the designated beneficiaries upon the owner's death. Second,
as explained above, each beneficiary must be a qualifying beneficiary.
And third, for POD accounts, the beneficiaries must be specifically
named in the deposit account records of the depository institution.
Under the current rules, the beneficiaries of a living trust need not
be indicated in the institution's records.\3\
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    \3\ Id. at 330.10(a) & (b).
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    If a revocable trust account owner names one or more non-qualifying
beneficiaries in the account (or trust), the funds corresponding to
those non-qualifying beneficiaries are considered the single-ownership
funds of the depositor and insured under that category of coverage. For
example, assume a depositor owns a POD account (and no other accounts
at the same institution) naming his spouse and a friend as
beneficiaries. The account has a balance of $200,000. The coverage
would be $100,000 under the revocable trust coverage rules because he
has named one qualifying beneficiary, and $100,000 would be insured
under the single-ownership coverage rules because the funds
attributable to the non-qualifying beneficiary (the friend) would be
considered the owner's single-ownership funds and thus insured under
that category of ownership. If the account owner in this example also
has a single-ownership account with a balance of, say, $50,000, then
the $100,000 (attributable to the non-qualifying beneficiary) from his
POD account would be added to the funds held in the single-ownership
account and be insured to a limit of $100,000. Thus, $50,000 would be
uninsured.
    As explained above, both POD accounts and living trust accounts are
types of revocable trust accounts insured under the revocable trust
account category in the FDIC's coverage rules. Consequently, all funds
that a depositor holds in both living trust accounts and POD accounts
naming the same beneficiaries are aggregated for insurance purposes and
insured to the applicable coverage limits. For example, assume a
depositor has a living trust account for $200,000 in connection with a
living trust naming his children, A and B. If the depositor also has a
$200,000 POD account naming A and B, the combined coverage on the two
accounts would be $200,000--not $200,000 per account.

Prior Guidance on and Revisions to the Revocable Trust Account Coverage
Rules

    Prior to the late 1980s, when living trusts began to emerge, the
coverage rules for revocable trust accounts were easy to understand and
apply. Revocable trusts were almost exclusively in the form of POD
accounts, and the coverage was determined based on the number of
qualifying beneficiaries named on the signature card used to establish
the account. In fact, the opening of the POD account (solely through
the completion of the signature card) resulted in the formation of the
trust.
    In 1994, as living trusts became increasingly popular, the FDIC
published guidelines on the insurance coverage of living trust
accounts.\4\ The guidelines addressed how the FDIC would insure living
trust accounts amid the complicating factor that many living trusts
contained clauses tying a beneficiary's entitlement to the trust assets
to the satisfaction of specified conditions, known as defeating
contingencies. Despite the issuance of these guidelines, bankers and
depositors continued to be confused and uncertain about the insurance
coverage of living trust accounts. This confusion and uncertainty was
understandable, given the complex legal theory and analysis needed to
determine the coverage of living trust accounts involving defeating
contingencies. In 2004, the FDIC simplified the rules for living trust
accounts by amending the regulations to provide coverage for the owners
of living trust accounts, irrespective of defeating contingencies in
the trust. The FDIC's objectives behind this rulemaking were to
simplify the existing rules and to provide coverage for living trust
accounts similar to POD account coverage.\5\
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    \4\ FDIC Advisory Opinion 94-32 (May 14, 1994).
    \5\ 69 FR 2825, 2827 (Jan. 21, 2004).
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    Despite the FDIC's past efforts to simplify and clarify the
coverage rules for living trust accounts, confusion and uncertainty
continue to exist among bankers and depositors. One reason for this
situation is that living trusts are becoming increasingly complex. A
typical living trust is a trust with two grantors, husband and wife,
who have full access to the trust assets during their lifetimes, with
the trust providing for a life estate interest for the surviving spouse
upon the death of the first spouse and then providing for a ``family
trust'' (in the form of an irrevocable trust) for designated family
members upon the death of the second spouse. It is also common for
living trusts to provide for lump-sum payments to designated
beneficiaries. The FDIC's coverage rules for living trust accounts, as
the result of the 2004 revisions, in theory are fairly straightforward,
but applying them to complex living trusts has resulted in significant
continuing confusion and uncertainty among bankers and depositors.
Also, upon an institution failure, because of the complexities of
living trusts, FDIC determinations on the coverage available to owners
of living trust accounts are often time consuming; thus, depositors are
sometimes delayed in receiving their insured funds.

II. The Interim Rule

Overview

    The FDIC's goals in this rulemaking are twofold. One is to make the
coverage rules for revocable trust accounts easy to understand and easy
to apply (in determining the applicable coverage amount), without
decreasing coverage currently available for revocable trust account
owners. The other is to retain reasonable limitations on coverage
levels for revocable trust account owners. Under the new rules, a trust
account owner with up to $500,000 in revocable trust accounts at one
FDIC-insured institution is insured up to $100,000 \6\ per beneficiary.
(This is the rule that will apply to the vast majority of revocable
trust account owners.) Revocable trust account owners with more than
$500,000 and more than five different beneficiaries named in the
trust(s) are insured for the greater of either: $500,000 or the
aggregate amount of all the beneficiaries' interests in the

[[Page 56708]]

trust(s), limited to $100,000 per beneficiary.
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    \6\ Technically, as reflected in the regulatory text, this
limitation is the Standard Maximum Deposit Insurance Amount
(``SMDIA''), currently $100,000. Thus, the coverage would
automatically reflect any future inflation adjustments to the SMDIA
consistent with section 11(a)(1)(F) of the FDI Act, 12 U.S.C.
1821(a)(1)(F). For ease of reference, throughout this notice we will
use $100,000 as the basic coverage amount.
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    Under the interim rule, coverage is based on the existence of any
beneficiary named in the revocable trust, as long as the beneficiary is
a natural person, or a charity or other non-profit organization.\7\ As
discussed below, under the interim rule the concept of ``qualifying
beneficiaries'' is eliminated. For an account owner with combined
revocable trust account balances of $500,000 \8\ or less, the maximum
available coverage would be determined simply by multiplying the number
of beneficiaries by $100,000.
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    \7\ If in establishing a POD account, the owner names a living
trust as the beneficiary, we will consider the beneficiaries of the
trust to be the beneficiaries of the POD account.
    \8\ Technically, this amount is fives times the SMDIA.
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    A living trust account with a balance of $400,000, for example,
would be insured for up to $400,000 as long as there are at least four
beneficiaries named in the trust.\9\ Different proportional ownership
interests of the beneficiaries in the trust assets would not affect the
deposit insurance coverage. So, in this example, the maximum coverage
would be $400,000 even if the trust provided that beneficiaries A and B
are entitled to twenty percent each of the trust assets and
beneficiaries C and D are entitled to thirty percent each of the trust
assets. As under the current rules, however, a depositor would receive
a combined maximum coverage amount of $100,000 for the same beneficiary
named in more than one revocable trust account he or she owns at one
insured institution.\10\
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    \9\ This assumes the account owner has no other revocable trust
accounts at the same depository institution.
    \10\ For example, if a depositor has a POD account naming her
son as a beneficiary and a living trust account at the same bank
naming the same son as a beneficiary, the depositor would be
entitled to no more than $100,000 with respect to having named her
son a beneficiary of her revocable trust accounts.
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Eliminating the Concept of ``Qualifying Beneficiaries''

    As explained above, currently revocable trust account coverage is
based, in large part, on the number of qualifying beneficiaries named
in the trust. Qualifying beneficiaries are defined as the revocable
trust account owner's spouse, children, grandchildren, parents and
siblings.\11\ Prior to 1999, the definition included only the owner's
spouse, children and grandchildren. The FDIC's rationale in 1999 for
expanding the definition of qualifying beneficiaries to include the
account owner's parents and siblings was to recognize other family
members likely to be named in a person's revocable trust. The objective
was to prevent depositors from losing money in an institution failure
because of their misunderstanding of the coverage rules for revocable
trust accounts.\12\
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    \11\ 12 CFR 330.10(a).
    \12\ 64 FR 15657 (Apr. 1, 1999).
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    Before and since the 1999 expansion of the definition of qualifying
beneficiaries, depositors, consumer groups and bankers have questioned
the fairness of limiting the coverage on revocable trust accounts to
the naming of certain beneficiaries. Many have argued that the FDIC
should expand the definition of qualifying beneficiaries to include,
among others, an account holder's nieces and nephew, in-laws, great-
grandchildren, cousins, friends and charities. Historically, the FDIC's
response to such complaints has been that there must be a reasonable
limitation of the amount of coverage available on revocable trust
accounts; otherwise, there would be potentially unlimited coverage
under this account category. Hence, the FDIC has been reluctant to
amend the rules to provide coverage based on any beneficiary(ies) named
in a revocable trust. Under the interim rule, however, the FDIC
believes that it can achieve greater fairness under the revocable trust
rules by basing coverage on the naming of any beneficiary in a
revocable trust, but concurrently imposing coverage qualifications
(discussed below) on accounts over $500,000.
    In addition to addressing the fairness issue, eliminating the
concept of ``qualifying beneficiaries'' makes the coverage rules easier
to understand. Depositors and bankers no longer need to know who is a
qualifying beneficiary and who is not. Also, this revision will obviate
the need for FDIC claims agents, upon an institution's failure, to
confirm that a beneficiary named in a revocable trust account is a
qualifying beneficiary. Thus, under the interim rule, the FDIC
anticipates being able to make quicker deposit insurance determinations
on revocable trust accounts at institution failures.

For Accounts With Aggregate Balances of $500,000 or Less, Determining
Coverage Without the Necessity of Discerning Each Beneficiary's
Interest in the Trust(s)

    One of the most confusing and complex aspects of determining
revocable trust account coverage under the current rules is having to
discern and consider unequal beneficial interests in revocable trusts.
This issue typically arises in the context of a living trust that, for
example, provides either varying lump-sum payments for designated
beneficiaries or different percentage interests in trust assets to
certain beneficiaries, or different remainder interests in the assets
to the same or other beneficiaries. The method for determining coverage
in some situations involving unequal beneficial interests necessitates
the formulation and solving of simultaneous equations. Consumers and
bankers alike find applying the current revocable trust account rules
to complicated living trusts, especially ones involving unequal
beneficial interests, far too complex. The FDIC agrees. Therefore, a
key component of the interim rule is the ability to determine coverage
available to account owners without regard to unequal interests of the
beneficiaries named in the revocable trust(s). The FDIC believes this
rule change, coupled with the recognition of all beneficiaries, will
make the revocable trust account rules simpler and more transparent.

Retaining Current Coverage Levels for Account Owners With More Than
$500,000 in Revocable Trust Accounts and More Than Five Beneficiaries
Named in the Trusts(s)

    Based on our experience at recent institution failures, the FDIC
believes that the vast majority of revocable trust account owners have
less than $500,000 in revocable trust accounts at one FDIC-insured
institution. Thus, under the interim rule coverage for an account
owner's revocable trust accounts will be determined simply by
multiplying the number of different beneficiaries named in the trust(s)
by $100,000.
    In order to retain reasonable limits on the maximum coverage
available to revocable trust account owners and also to retain the
coverage available to revocable trust account owners under the current
coverage rules, the interim rule provides special treatment for
depositors with revocable trust accounts over $500,000 naming more than
five beneficiaries. Under the interim rule, revocable trust account
owners with more than $500,000 and more than five beneficiaries named
in the trusts are insured for the greater of either: $500,000 or the
aggregate amount of all the beneficiaries' interests in the trusts(s),
limited to $100,000 per beneficiary. This coverage is no less than the
coverage afforded to such account owners under the current rules,
particularly because under the interim rule the coverage is based on
the number of beneficiaries, not the number of qualifying
beneficiaries. Also, as discussed below, under the interim rule life-
estate interest holders are deemed to

[[Page 56709]]

have a $100,000 interest in the trust assets.
    For example, assume an individual has a living trust account. The
living trust provides a life estate interest for that individual's
spouse, $15,000 for his college, $5,000 for each of three brothers and
the remaining amount to his friend. The balance in the account is
$600,000. Here the account balance exceeds $500,000 and the number of
beneficiaries is more than five. Hence, under the interim rule, the
maximum coverage would be the greater of either: $500,000 or the
aggregate beneficial interests of all the beneficiaries (up to a limit
of $100,000 per beneficiary). The beneficial interests are: $100,000
for the spouse's life estate interest, $15,000 for the college, $5,000
for each brother (totaling $15,000), and $100,000 for the friend
(because of the per-beneficiary limitation of $100,000). The total
beneficial interests, thus, would be $230,000. Hence, the maximum
coverage afforded to the account owner would be $500,000, the greater
of $500,000 or $230,000.
    The FDIC believes that basing the coverage of trust accounts over
$500,000 (with more than five different beneficiaries in the trust(s))
on the ownership interest of each beneficiary named in the applicable
trust(s) would prevent the potential of providing unlimited coverage
with respect to revocable trust accounts. Without such a limitation, an
account owner could name a limitless number of beneficiaries each with
a nominal interest in the trust and obtain coverage up to $100,000 for
naming each such beneficiary. For example, a revocable trust account
held in connection with a trust entitling one beneficiary to $1 million
and entitling each of nine other beneficiaries to $1 would be insured
for $1 million, without the limitation imposed under the interim rule.

Treatment of Life-Estate Interests

    Another complicating factor in determining the coverage for living
trust accounts is determining the value of life estate interests. A
life estate interest usually means the life-estate beneficiary is
entitled to the income on the trust assets during his or her lifetime.
A large percentage of living trusts provide a life estate interest for
one or more beneficiaries. The most typical situation is where a
married person creates a trust providing a life estate interest for his
or her surviving spouse and a remainder interest for their children.
The FDIC's current rules provide that, in such situations, each life-
estate holder and each remainder-man (also known as residuary
beneficiaries) is deemed to have an equal interest in the trust assets
for deposit insurance purposes.\13\ This rule has proven difficult to
apply, especially where the living trust provides for lump-sum gifts
for certain beneficiaries, life estate interests for others and
different percentage interests for the remainder-men, who may be the
same as or different from the other beneficiaries. In order to simplify
the coverage rules, the interim rule revises the current valuation
method for life estate interests by deeming each such interest to be
$100,000, for purposes of determining deposit insurance coverage. The
example above (involving a trust providing for a spousal life estate
interest and bequests to the owner's college, brothers and friend)
demonstrates how the interim rule would apply to a living trust
providing for a life-estate interest.
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    \13\ 12 CFR 330.10(f)(3).
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Treatment of Irrevocable Trusts Springing From a Revocable Trust

    Another current complexity in determining coverage for living trust
accounts is that, when it is created, a living trust is a revocable
trust but, when the owner dies, the trust becomes irrevocable.\14\ At
that stage in the lifecycle of the living trust, the funds
corresponding to the irrevocable trust are insured under the FDIC's
rules for irrevocable trust accounts.\15\ Under those rules, coverage
is based on the non-contingent interest of each beneficiary named in
the trust. In effect, when a living trust evolves from a revocable
trust to an irrevocable trust the insurance coverage available on the
account is based on a different set of rules--the irrevocable trust
account rules. As such, the coverage on the account often decreases
from what it had been when the trust was insured solely under the
revocable trust rules.
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    \14\ For jointly owned living trusts, upon the death of one of
the owners, typically part of the trust remains revocable and part
becomes irrevocable.
    \15\ 12 CRR 330.13.
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    To eliminate this complexity and the confusion it generates, under
the interim rule, the rules for determining the coverage of the living
trust account will remain the same when the trust (or part of the
trust) converts to an irrevocable trust. For example, a grantor has a
living trust account held in connection with a trust naming three
beneficiaries, each of whom receives a specified share of the trust
assets if he or she graduates from college by age 25. Under the current
insurance rules, when the grantor is alive (meaning that the trust is
still a revocable trust) the maximum coverage on the account is
$300,000--1 grantor times 3 beneficiaries times $100,000. Also under
the current rules, upon the grantor's death (allowing for the six-month
grace period during which coverage would remain the same), the coverage
reduces to $100,000 (if none of the beneficiaries has graduated from
college yet) because of the contingent nature of the beneficial
interests provided for in the trust. Under the interim rule,
contingencies would continue to be irrelevant for coverage purposes
after the grantor's death, even though the trust has evolved into an
irrevocable trust. In this example, under the interim rule the coverage
would still be up to $300,000.
    The FDIC believes that the continuity of coverage provided for
under this component of the interim rule would greatly simplify the
current rules for determining coverage for living trust accounts. It is
important to note, however, that under the interim rule the coverage on
a living trust account could still change during the lifecycle of the
trust. For example, when both grantors in a co-grantor trust are alive,
the maximum coverage on the account would be $1,000,000, because the
formula for determining coverage would be: 2 (grantors) times 5
beneficiaries times $100,000.\16\ If one of the grantors dies, then the
maximum coverage would be 1 (grantor) times 5 beneficiaries times
$100,000.\17\ Coverage would likewise decrease if one or more of the
beneficiaries named in the revocable trust died, assuming the death of
the beneficiary(ies) would cause the total number of beneficiaries to
drop below five.
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    \16\ This assumes neither grantor has any other revocable trust
accounts at the same insured institution.
    \17\ Of course, the FDIC rules provide for a six-month grace
period after the death of an account owner during which the coverage
would be the same as if the owner (grantor) were still alive. 12 CFR
330.3(j).
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Impact of Proposed Rules on the Deposit Insurance Fund Reserve Ratio

    Eliminating the concept of qualifying beneficiaries and
disregarding unequal interests in a trust (for accounts with five or
fewer beneficiaries) theoretically will increase coverage immediately.
Since no industry-wide data are maintained on trust accounts, a
definite determination of the extent of this effect on insurance
coverage for existing accounts is difficult. Thus, the precise effect
the proposal will immediately have on the Deposit Insurance Fund
(``DIF'') reserve ratio can be estimated,

[[Page 56710]]

as discussed below, but cannot be determined with precision.\18\
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    \18\ The reserve ratio is determined by dividing the DIF fund
balance by the estimated insured deposits by the industry (12 U.S.C.
1817(l)).
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    In fifteen failures from 1999 to 2003 and three failures from the
past year for which final insurance determinations have been made,
approximately ninety-seven percent of the funds in revocable trust
accounts were insured on average and approximately twenty-five percent
of domestic deposits were in revocable trust accounts on average. If
conclusions from these eighteen failed institutions can be generalized
to the banking industry as a whole, then, even if all current revocable
trust deposits were to become insured, the effect on total insured
deposits and on the DIF reserve ratio would be small. Recognizing that
this data does not provide a strong statistical basis for drawing
conclusions, we welcome comments on the effect of the interim rule on
the level of insured deposits.
    In the long-term, eliminating the concept of qualifying
beneficiaries could bring more insured deposits into the system. For
example, since, under the interim rule, nieces and nephews are eligible
beneficiaries, a depositor might add her niece and nephew to a trust
account that previously had only a sister as the sole beneficiary.
Anticipating future moves by depositors is even more difficult than
estimating the immediate effect on deposit insurance coverage. Thus,
the long-term effect of the interim rule on insured deposits and on the
reserve ratio is even more uncertain, beyond the conclusion that over
time the change can be expected to lower the reserve ratio to some
(likely limited) degree.

Effective Date of the Interim Rule

    The interim rule is effective on September 26, 2008, the date on
which the FDIC Board of Directors approved the interim rule. It is also
the date this interim rule was filed for public inspection with the
Office of the Federal Register. In this regard, the FDIC invokes the
good cause exception to the requirements in the Administrative
Procedure Act \19\ (``APA'') that, before a rulemaking can be
finalized, it must first be issued for public comment and, once
finalized, must have a delayed effective date of thirty days from the
publication date. The FDIC believes good cause exists for making the
interim rule effective immediately because, based on recent depository
institution failures, it is evident that many depositors and depository
institution employees misunderstand the insurance rules for revocable
trust accounts. The interim rule simplifies and modernizes the coverage
rules for revocable trust accounts and, hence, will provide greater
certainty to depositors and depository institution employees about the
extent to which revocable trust accounts are insured.
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    \19\ 5 U.S.C. 553.
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    Importantly, under the interim rule, no depositor will be insured
for an amount less than he or she would have been entitled to under the
current revocable trust account rules. Some depositors will be entitled
to greater coverage under the interim rule than under the current
rules, especially because under the interim rule a beneficiary need no
longer be a qualifying beneficiary for the account owner to be insured
on a per-beneficiary basis. Moreover, the FDIC believes that the
interim rule will result in faster deposit insurance determinations
after depository institution closings and will help improve public
confidence in the banking system.
    For these reasons, the FDIC has determined that the public notice
and participation that ordinarily are required by the APA before a
regulation may take effect would, in this case, be contrary to the
public interest and that good cause exists for waiving the customary
30-day delayed effective date. Nevertheless, the FDIC desires to have
the benefit of public comment before adopting a permanent final rule
and thus invites interested parties to submit comments during a 60-day
comment period. In adopting the final regulation, the FDIC will revise
the interim rule, if appropriate, in light of the comments received on
the interim rule.

III. Request for Comments

    The FDIC requests comments on all aspects of the proposed
rulemaking. We solicit specific comments on: (1) Whether ``over
$500,000'' is the proper threshold for determining coverage for
revocable trust account owners based on the beneficial interests of the
trust beneficiaries; (2) whether the FDIC's irrevocable trust account
rules should be revised so that all trusts are covered by substantially
the same rules; and (3) what effect the interim rule will have on the
level of insured deposits.

IV. Paperwork Reduction Act

    The interim rule will revise the FDIC's deposit insurance
regulations. It will not involve any new collections of information
pursuant to the Paperwork Reduction Act (44 U.S.C. 3501 et seq.).
Consequently, no information collection has been submitted to the
Office of Management and Budget for review.

V. Regulatory Flexibility Act

    The Regulatory Flexibility Act requires an agency that is issuing a
final rule to prepare and make available a regulatory flexibility
analysis that describes the impact of the final rule on small entities.
5 U.S.C. 603(a). The Regulatory Flexibility Act provides that an agency
is not required to prepare and publish a regulatory flexibility
analysis if the agency certifies that the final rule will not have a
significant economic impact on a substantial number of small entities.
    Pursuant to section 605(b) of the Regulatory Flexibility Act, the
FDIC certifies that the interim rule will not have a significant impact
on a substantial number of small entities. The interim rule simplifies
the deposit insurance rules for revocable trust accounts held at FDIC-
insured depository institutions.

VI. The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families

    The FDIC has determined that the proposed rule would not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, enacted as part of the Omnibus
Consolidated and Emergency Supplemental Appropriations Act of 1999
(Pub. L. 105-277, 112 Stat. 2681). The interim should have a positive
effect on families by clarifying the coverage rules for revocable trust
accounts, a popular type of consumer bank account.

VII. Small Business Regulatory Enforcement Fairness Act

    The Office of Management and Budget has determined that the interim
rule is not a ``major rule'' within the meaning of the relevant
sections of the Small Business Regulatory Enforcement Act of 1996
(``SBREFA'') (5 U.S.C. 801 et seq.). As required by SBREFA, the FDIC
will file the appropriate reports with Congress and the General
Accounting Office so that the interim rule may be reviewed.

VIII. Plain Language

    The FDIC has sought to present the interim rule in a simple and
straightforward manner. The FDIC invites comment on whether it could
take additional steps to make the rule easier to understand.

[[Page 56711]]

List of Subjects in 12 CFR Part 330

    Bank deposit insurance, Banks, banking, Reporting and recordkeeping
requirements, Savings and loan associations, Trusts and trustees.

0
For the reasons stated above, the Board of Directors of the Federal
Deposit Insurance Corporation amends part 330 of chapter III of title
12 of the Code of Federal Regulations as follows:

PART 330--DEPOSIT INSURANCE COVERAGE

0
1. The authority citation for part 330 continues to read as follows:

    Authority: 12 U.S.C. 1813(l), 1813(m), 1817(i), 1818(q), 1819
(Tenth), 1820(f), 1821(a), 1822(c).


0
2. Section 330.10 is revised to read as follows:


Sec.  330.10  Revocable trust accounts.

    (a) General rule. Except as provided in paragraph (e) of this
section, the funds owned by an individual and deposited into one or
more accounts with respect to which the owner evidences an intention
that upon his or her death the funds shall belong to one or more
beneficiaries shall be separately insured (from other types of accounts
the owner has at the same insured depository institution) in an amount
equal to the total number of different beneficiaries named in the
account(s) multiplied by the SMDIA. This section applies to all
accounts held in connection with informal and formal testamentary
revocable trusts. Such informal trusts are commonly referred to as
payable-on-death accounts, in-trust-for accounts or Totten Trust
accounts, and such formal trusts are commonly referred to as living
trusts or family trusts. (Example 1: An individual has a living trust
account with four beneficiaries named in the trust. The account owner
has no other revocable trust accounts at the same FDIC-insured
institution. The maximum insurance coverage would be $400,000,
determined by multiplying 4 (the number of beneficiaries) times
$100,000 (the current SMDIA). Example 2: An individual has a payable-
on-death account naming his niece and cousin as beneficiaries and, at
the same FDIC-insured institution, has another payable-on-death account
naming the same niece and a friend as beneficiaries. The maximum
coverage available to the account owner would be $300,000. This is
because the account owner has named three different beneficiaries in
the revocable trust accounts. The naming of the same beneficiary in
more than one revocable trust account, whether it be a payable-on-death
account or living trust account, does not increase the total coverage
amount.)
    (b) Required intention. The required intention in paragraph (a) of
this section that upon the owner's death the funds shall belong to one
or more beneficiaries must be manifested in the title of the account
using commonly accepted terms such as, but not limited to, in trust
for, as trustee for, payable-on-death to, or any acronym therefore. In
addition, for informal revocable trust accounts, the beneficiaries must
be specifically named in the deposit account records of the insured
depository institution. The settlor of a revocable trust shall be
presumed to own the funds deposited into the account.
    (c) Definition of beneficiary. For purposes of this section, a
beneficiary includes natural persons as well as charitable
organizations and other non-profit entities recognized as such under
the Internal Revenue Code of 1986.
    (d) Interests of beneficiaries outside the definition of
beneficiary in this section. If a beneficiary named in a trust covered
by this section does not meet the definition of beneficiary in
paragraph (c) of this section, the funds corresponding to that
beneficiary shall be treated as the individually owned (single
ownership) funds of the owner(s). As such, they shall be aggregated
with any other single ownership accounts of such owner(s) and insured
up to the SMDIA per owner. (Example: If an individual establishes an
account payable-on-death to a pet, the account would be insured as a
single-ownership account.)
    (e) Revocable trust accounts with aggregate balances exceeding five
times the SMDIA and naming more than five different beneficiaries.
Notwithstanding the general coverage provisions in paragraph (a) of
this section, for funds owned by an individual in one or more revocable
trust accounts naming more than five different beneficiaries and whose
aggregate balance is more than five times the SMDIA, the maximum
revocable trust account coverage for the account owner shall be the
greater of either: five times the SMDIA or the aggregate amount of the
ownership interests of each different beneficiary named in the trusts,
to a limit of the SMDIA per different beneficiary. (Example: A has a
living trust account with a balance of $600,000. Under the terms of the
trust, upon A's death, A's three children are each entitled to $50,000,
A's friend is entitled to $5,000 and a designated charity is entitled
to $70,000. The trust also provides that the remainder of the trust
assets shall belong to A's spouse. In this case, because the balance of
the account is over $500,000 (which is five times the current SMDIA of
$100,000) and there are more than five different beneficiaries named in
the trust, the maximum coverage available to A would be the greater of:
$500,000 or the aggregate of each different beneficiary's interest to a
limit of $100,000 per beneficiary. The beneficial interests in the
trust considered for purposes of determining coverage are: $50,000 for
each of the children (totaling $150,000), $5,000 for the friend,
$70,000 for the charity, and $100,000 for the spouse ($375,000, subject
to the $100,000 limit per beneficiary). The aggregate beneficial
interests, thus, are $325,000. Hence, the maximum coverage afforded to
the account owner would be $500,000, the greater of $500,000 or
$325,000.)
    (f) Joint revocable trust accounts. (1) Where an account described
in paragraph (a) of this section is established by more than one owner,
the respective interest of each account owner (which shall be deemed
equal) shall be insured separately, per different beneficiary, up to
the SMDIA, subject to the limitation imposed in paragraph (e) of this
section. (Example 1: A & B, two individuals, establish a payable-on-
death account naming their three nieces as beneficiaries. Neither A nor
B has any other revocable trust accounts at the same FDIC-insured
institution. The maximum coverage afforded to A&B would be $600,000,
determined by multiplying the number of owners (2) times the SMDIA
(currently $100,000) times the number of different beneficiaries (3).
In this example, A would be entitled to revocable trust coverage of
$300,000 and B would be entitled to revocable trust coverage of
$300,000. Example 2: A and B, two individuals, establish a payable-on-
death account naming their two children, two cousins and a charity as
beneficiaries. The balance in the account is $700,000. Neither A nor B
has any other revocable trust accounts at the same FDIC-insured
institution. The maximum coverage would be determined (under paragraph
(a) of this section) by multiplying the number of account owners (2)
times the number of different beneficiaries (5) times $100,000, or $1
million. Because the account balance is less than the maximum coverage
amount, the account would be fully insured. Example 3: A and B, two
individuals, establish a living trust account with a balance of $1.5
million. Under the terms of the trust, upon the death of both A & B,
each of A & B's three children is entitled to $200,000, B's cousin is
entitled to $150,000, A's friend is entitled to

[[Page 56712]]

$30,000 and the remaining amount ($720,000) goes to a charity. Under
paragraph (e) of this section, the maximum coverage, as to each joint
account owner, would be the greater of $500,000 or the aggregate amount
(as to each joint owner) of the interest of each different beneficiary
named in the trust, to a limit of $100,000 per account owner per
beneficiary. The beneficial interests in the trust considered for
purposes of determining coverage for account owner A are: $300,000 for
the children (three times $100,000), $75,000 for the cousin, $15,000
for the friend and $100,000 for the charity ($360,000 subject to the
$100,000 per-beneficiary limitation). As to A, the aggregate amount of
the beneficial interests eligible for deposit insurance coverage, thus,
is $490,000. Hence, the maximum coverage afforded to joint account
owner A would be $500,000, the greater of $500,000 or $490,000 (the
aggregate of all the beneficial interests attributable to A, limited to
$100,000 per beneficiary). The same analysis and coverage determination
also would apply to B.
    (2) Notwithstanding paragraph (f)(1) of this section, where the
owners of a joint revocable trust account are themselves the sole
beneficiaries of the corresponding trust, the account shall be insured
as a joint account under section 330.9 and shall not be insured under
the provisions of this section. (Example: If A and B establish a
payable-on-death account naming themselves as the sole beneficiaries of
the account, the account will be insured as a joint account because the
account does not satisfy the intent requirement (under paragraph (a) of
this section) that the funds in the account belong to the named
beneficiaries upon the owners' death. The beneficiaries are in fact the
actual owners of the funds during the account owners' lifetimes.)
    (g) For deposit accounts held in connection with a living trust
that provides for a life-estate interest for designated beneficiaries,
the FDIC shall value each such life estate interest as the SMDIA for
purposes of determining the insurance coverage available to the account
owner.
    (h) Revocable trusts that become irrevocable trusts.
Notwithstanding the provisions in section 330.13 on the insurance
coverage of irrevocable trust accounts, a revocable trust account shall
continue to be insured under the provisions of this section even if the
corresponding revocable trust, upon the death of one or more of the
owners thereof, converts, in part or entirely, to an irrevocable trust.
(Example: Assume A and B have a trust account in connection with a
living trust, of which they are joint grantors. If upon the death of
either A or B the trust transforms into an irrevocable trust as to the
deceased grantor's ownership in the trust, the account will continue to
be insured under the provisions of this section.)
    (i) This section shall be effective as of September 26, 2008 for
all existing and future revocable trust accounts and for existing and
future irrevocable trust accounts resulting from formal revocable trust
accounts.

    Dated at Washington DC, this 26th day of September 2008.

    By order of the Board of Directors.

Federal Deposit Insurance Corporation.
Robert E. Feldman,
Executive Secretary.

 


Last Updated 09/30/2008 Regs@fdic.gov