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4000 - Advisory Opinions


Question regarding deposit insurance of a joint revocable trust account under the FDIC's revised revocable trust account rules.

FDIC--04--06 September 21, 2004 Joseph A. DiNuzzo, Counsel

This is in response to your letter and our telephone conversation about the deposit insurance coverage of a joint revocable trust account under the FDIC's revised revocable trust account rules. You are correct that some of the issues raised in your letter are not directly addressed in the revised regulation. We welcome the opportunity to address them in reply to your questions.

The first scenario you pose is: A husband and wife create a joint revocable trust with $1 million. The trust is invested entirely in an account at one FDIC-insured institution. The husband and wife have no other accounts at that institution. When the first spouse dies, the joint trust will terminate and fund two trusts--a family trust and a marital trust (also known as a survivor's trust). The family trust is irrevocable and will receive one-half of the joint trust assets up to the federal estate tax exemption amount (currently $1.5 million). The surviving spouse has a life estate interest in the family trust and the remainder will pass to the couple's three children. The marital trust will receive the remaining joint trust assets. The marital trust is a revocable trust for the benefit of the surviving spouse. When the surviving spouse dies, the remaining funds in the marital trust go into the family trust.

For revocable trust accounts, deposit insurance coverage is based on who is alive when the institution fails and whether the trust or trusts then in effect are revocable or irrevocable. Coverage also depends on the allocation of funds among the trust beneficiaries.

Coverage When Both Settlors Are Alive

Under your scenario, when both the husband and wife are alive, the joint revocable trust account would be insured up to $600,000. That's because there are two settlors (the parents) and three qualifying beneficiaries (the children) as to each settlor. When both settlors are alive, as under the FDIC's prior rules, the revised revocable trust account rules provide coverage for joint revocable trusts based on the beneficiaries entitled to the trust assets upon the death of the last settlor. 12 C.F.R. 330.10(f), as revised at 69 Fed. Reg. 2825, 2829 (Jan. 21, 2004). Here the three children would be entitled to the funds upon the death of the second parent and the maximum coverage would be $100,000 per settlor per child. Hence, if both settlors are alive and the institution fails, an account such as this with a balance of $1 million would be insured to a maximum of $600,000.

Coverage When the First Settlor Dies

When the first settlor dies, the joint "living trust" is replaced by two trusts: the marital trust and the family trust.1 In this case, you note that under the trust agreement one-half of the $1 million balance would be allocated to the marital trust and the other half would be allocated to the family trust. With this allocation, the FDIC would provide insurance as explained below.

The Marital Trust

If, as you indicated, the marital trust is a revocable trust, the surviving spouse would be the sole settlor of the marital trust.2 (For deposit insurance purposes, the FDIC treats the owner of the funds as the insured party. Here the surviving settlor is the sole owner of the funds in the marital trust; thus, we would deem him or her to be the sole settlor for insurance purposes.) The beneficiaries of the revocable marital trust, under the FDIC's rules governing revocable trusts (explained above), would be the individuals entitled to the funds upon the death of the settlor. See 12 C.F.R. § 330.10(f). Here, according to your description, the funds in the marital trust--upon the death of the settlor--would be transferred to the family trust and then distributed equally to the three children. This means that the three children are the beneficiaries of the marital trust.3

As mentioned above, the amount of funds allocated to the marital trust would be one-half of the $1 million balance, or $500,000. With one settlor (the surviving spouse) and three qualifying beneficiaries (the three children), the revocable marital trust with a balance of $500,000 would be insured in the amount of $300,000 and uninsured in the amount of $200,000. See 12 C.F.R. § 330.10(a).

The Family Trust

You indicated that the family trust is an irrevocable trust with two settlors: the deceased spouse and the surviving spouse.4 The insurance coverage of irrevocable trust accounts is governed by 12 C.F.R. § 330.13. Under that section of the FDIC's regulations, funds representing a "non-contingent trust interest" of a particular beneficiary are insured up to $100,000. See 12 C.F.R. § 330.13(a). The term "non-contingent trust interest" is defined as "a trust interest capable of determination without evaluation of contingencies except for those covered by the present worth tables and rules of calculation for their use provided in § 20.2031-7 of the Federal Estate Tax Regulations (26 CFR 20.2031-7) or any similar present worth or life expectancy tables which may be adopted by the Internal Revenue Service." 12 C.F.R. § 330.1(l). To the extent that beneficiaries' interests do not satisfy this definition of "non-contingent trust interest," then the funds representing all such contingent interests are added together and insured up to $100,000. See 12 C.F.R. § 330.13(b). Finally, to the extent that a settlor has retained an interest in any funds, such funds are insured to the settlor up to $100,000 in the single ownership category. See 12 C.F.R. § 330.1(p) ("Trust interest means the interest of a beneficiary in an irrevocable express trust . . . but does not include any interest retained by the settlor").

In the case of an irrevocable trust established by two settlors, the FDIC provides separate insurance for the funds contributed by each settlor. See 12 C.F.R. § 330.13(a) ("Each trust interest' . . . in any irrevocable trust established by two or more settlors shall be deemed to be derived from each settlor pro rata to his or her contribution to the trust"). Thus, in this case, the funds contributed by the deceased spouse will be insured separately from the funds contributed by the surviving spouse.5 The coverage is explained in detail below.

The Funds Contributed by the Deceased Spouse. As noted, the balance of the family trust would be $500,000. This means that the funds contributed by the deceased spouse would be $250,000. The surviving spouse would be one of the beneficiaries of these funds. Under the trust, the surviving spouse would receive "a life estate interest." This means that the surviving spouse would receive interest (perhaps in the form of monthly payments) during the remainder of his/her life. The three children would be the other beneficiaries of the family trust. They would receive any remaining funds--in equal shares--upon the death of the surviving spouse.

The surviving spouse's right to receive interest would be a "non-contingent trust interest" under the FDIC's definition of this term (quoted above) because this interest could be calculated through the use of the present value/life expectancy tables in the Tax Code. See 12 C.F.R. § 330.1(1). The value of this interest would depend upon two factors: (1) the balance of funds ($250,000); and (2) the age of the surviving spouse. We do not have the information to determine the present value of the surviving spouse's life estate interest in the trust assets, but we will assume the amount would be a relatively small portion of the $250,000 balance. Assuming that amount is less than $100,000, this portion of the balance of $250,000 would be fully insured.

The remaining funds (i.e., $250,000 minus the present value of the surviving spouse's right to receive interest) would represent the interests of the three children. The fact that this money would be payable to three beneficiaries in equal shares means that the interest of each beneficiary would be less than $100,000. Therefore, the funds representing the interest of the three children would be fully insured. See 12 C.F.R. § 330.13(a).

In summary, the funds contributed by the deceased spouse in the amount of $250,000 would be fully insured. (Please note, however, that this conclusion depends upon the accuracy of your description of the trust agreement. In particular, this conclusion is based upon the assumption that the three children will receive their shares of the trust funds without contingencies.6 )

The Funds Contributed by the Surviving Spouse. The amount of funds contributed by the surviving spouse would be $250,000. The surviving spouse would be one of the beneficiaries of these funds. That person would receive interest in the trust assets during the remainder of his or her life. As previously discussed, the present value of the surviving spouse's right to receive interest would be ascertainable through the use of present value/life expectancy tables in the Tax Code. See 12 C.F.R. § 330.1(1). This amount of funds would not qualify as a "trust interest" because the settlor and the beneficiary would be the same person, i.e., the surviving spouse. In other words, the settlor would retain an interest in this amount of funds. See 12 C.F.R. § 330.1(p). Accordingly, this portion of the funds would be insured to the surviving spouse in the single ownership category. Assuming that this portion of funds would be less than $100,000 (and also assuming that the surviving spouse would not hold any single ownership accounts at the bank), this portion of funds would be fully insured.

The remaining funds (i.e., $250,000 minus the present value of the surviving spouse's right to receive interest) would represent the interests of the three children. The fact that this money would be payable to three beneficiaries in equal shares means that the interest of each beneficiary would be less than $100,000. Therefore, the funds representing the interests of the three children would be fully insured. See 12 C.F.R. § 330.13(a).

In summary, the funds contributed by the surviving spouse in the amount of $250,000 would be fully insured. (Again, please note that this conclusion depends upon the details of the trust agreement and, in particular, upon whether the three children will receive their shares of the trust funds without contingencies.7

Conclusion as to Coverage When the First Settlor Dies

For the reasons explained above, the funds in the revocable marital trust would be insured in the amount of $300,000 and uninsured in the amount of $200,000. The funds in the irrevocable family trust would be fully insured in the amount of $500,000.

Coverage When Both Settlors Have Died

If both settlors have died at the time of the institution failure, coverage would be determined under the family trust, yielding a combined maximum of $600,000--up to $100,000 per deceased settlor per child.8

Second Scenario

Your second scenario is similar to the first, except that the family trust is not funded with one-half of the joint assets up to the federal estate tax exemption amount. Instead, the family trust is funded with the amount to be disclaimed by the surviving spouse. If the surviving spouse does not make the disclaimer, the assets of the joint trust will pass entirely to the marital trust, which is revocable by the surviving spouse. As with the first scenario, when both spouses are alive, the coverage would be up to $600,000. This is because under the revised regulations coverage based on a beneficiary's interest is no longer affected by "defeating contingencies."

The possibility that the surviving spouse/parent might not fund the family trust is disregarded for deposit insurance purposes. Hence, coverage is provided up to $100,000 per grantor per qualifying beneficiary. When the first spouse dies, the maximum coverage for the funds in the marital trust would be the same as in the first scenario. If the family trust is not funded, no deposit insurance would be available in connection with that trust. If the family trust is funded for a lesser amount than indicated in the first scenario, the deposit insurance analysis and calculation methodology would be the same as under the first scenario.

I hope this is fully responsive to your questions. Feel free to call me at (202) 898-7349 with any additional questions or comments.

1Typically, the surviving spouse or trustee would be obligated to divide the trust funds between these two trusts. But you have asked for an opinion about the insurance coverage of one bank account representing both trusts. We are willing to provide such an opinion but we do not endorse this commingling of two trusts. Rather, we suggest that the surviving spouse or trustee open a separate account for each trust. In this manner, the surviving spouse or trustee could allocate the appropriate amount of funds to each trust. The duty to allocate funds lies with the trustee, not the FDIC.   An account in the name of the revocable marital trust would be insured in accordance with 12 C.F.R. § 330.10. Separately, an account in the name of the irrevocable family trust would be insured in accordance with 12 C.F.R. § 330.13. The operation of both sections of the FDIC's regulations is explained in this letter. Go back to Text

2The depositors should check the terms of the trust agreement to determine whether the marital trust is revocable. In some cases, a "marital trust" or "survivor's trust" is simply part of an irrevocable trust--not a separate revocable trust. Some depositors mistakenly believe that a "marital trust" or "survivor's trust" is revocable because the surviving spouse possesses a power to invade principal under certain circumstances. Such a power to invade principal is different than a power to revoke (i.e., terminate) the trust. If the marital trust in this case actually is part of an irrevocable trust (and not a separate revocable trust), then the analysis outlined in this letter would not apply. Go back to Text

3The treatment for a POD account naming a trust as a beneficiary is different. There the FDIC considers the trust to be a non-qualifying beneficiary; hence, for deposit insurance purposes, the funds attributable to the trust are deemed to be the owner's single-ownership funds. For POD accounts, the FDIC's deposit insurance reviews is limited to the beneficiaries named in the depository institution's deposit account records. Go back to Text

4The depositors should check the terms of the trust agreement to make sure that both spouses are considered settlors of the family trust. Also, the depositors should make sure that the contributions of the two settlors are considered equal. If the contributions are unequal, the analysis outlined in this letter with respect to the family trust would not apply. Go back to Text

5We would treat this trust as having two settlors because both settlors had created this testamentary irrevocable trust as part of the living trust. It is common for such trusts to come into existence when the settlors die. Go back to Text

6If the interests of the three children do not satisfy the FDIC's definition of "non-contingent trust interest," then the funds representing these contingent interests would be added together and insured up to only $100,000. See 12 C.F.R. § 330.13(b). Thus, the funds contributed by the deceased spouse in the amount of $250,000 would not be fully insured. Rather, these funds would be insured up to an amount somewhat greater than $100,000 (i.e., $100,000 coverage for the contingent interests of the three children and separate coverage for the present value of the surviving spouse's right to receive interest). Under these circumstances, the depositors should check the terms of the trust agreement to determine whether the interests of the children are subject to contingencies. Examples of contingencies are the following: (1) the surviving spouse will be entitled to invade the principal of the family trust; (2) the trustee on behalf of the surviving spouse will be entitled to invade the principal of the family trust; (3) the trustee will exercise discretion as to whether the children will receive any funds; and (4) the death of a child will result in the child's forfeiture of his/her interest in the trust (i.e., the child's share of the trust funds will not pass to the child's estate or heirs; rather, this share will pass to the other beneficiaries named in the trust). Go back to Text

7See footnote 4, supra. Go back to Text

8The FDIC's regulations provide a six-month grace period for deposit insurance coverage in connection with a deposit-owner's death. 12 C.F.R. 330.3(j). So, for example, if a settlor of a revocable trust dies, the coverage available on that account would remain the same (as if the settlor had not died) up until six months after the settlor's death, assuming that the funds are not withdrawn from the account and the account is not restricted prior to the end of the six months. Go back to Text


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