4000 - Advisory Opinions
Insurance coverage of a joint revocable trust account.
January 31, 2005
Joseph A. DiNuzzo, Counsel
This is in response to your e-mail inquiry about the insurance coverage of a joint revocable trust account. It also serves as a follow-up to my e-mail response to your question. As you have explained, the trust is a revocable trust established by a husband and wife. On the death of the first spouse, the trust is split into three sub-trusts. The discussion below notes the particulars of the sub-trusts.
When Both Settlors Are Alive
When both settlors are alive, the coverage would be up to $1.2 million. That is because there are two settlors and six qualifying beneficiaries (four grandchildren and two children) as to each settlor. The FDIC's revocable trust account rules provide coverage 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. 12, 2004). Here the six qualifying beneficiaries would be entitled to the funds upon the death of the second settlor and the maximum coverage would be $100,000 per settlor, per qualifying beneficiary, yielding $1.2 million. Upon the death of the first settlor the coverage would change.
When the First Settlor Dies1
Upon the death of the first spouse Trust A is created. It is a survivor's trust containing the surviving spouse's separate property and one-half of the community property. The trust remains revocable for the surviving spouse's life and the surviving spouse has a general power of appointment over the trust assets. On the surviving spouse's death, the remaining balance is added to Trust B and distributed pursuant to the terms of that trust. As described below, Trust B is an irrevocable trust.
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 survivor's trust; thus, we would deem him or her to be the sole settlor for insurance purposes. The beneficiaries of Trust A, under the FDIC's rules governing revocable trusts, would be the individuals entitled to the funds upon the death of the settlor. See 12 C.F.R. § 330.10(f). Here the funds in Trust A--upon the death of the settlor--would be transferred to Trust B and then distributed to the six beneficiaries, who all are "qualifying beneficiaries" under the FDIC's insurance rules. This means that the Trust B beneficiaries are, in essence, the beneficiaries of the survivor's trust.2 As such, the funds in the survivor's trust would be insured up to $100,000 per qualifying beneficiary, or $600,000.
Also upon the death of the first settlor, Trust B is created. It is an irrevocable trust holding the federal estate tax exclusion amount (currently $1.5 million) and paying net income to the surviving spouse for life. The trustee, who is the surviving spouse, may invade the principal of the trust. On the death of the surviving spouse, the funds in Trust B are distributed as follows: first, gifts of $100,000 will be made to each of four grandchildren; then, the balance will be divided equally among the settlors' two children (or their issue).
An account established in connection with Trust B would be insured under the FDIC's irrevocable trust rules. Under those rules the account would be insured up to $100,000 per beneficiary who has an ascertainable, non-contingent interest in the trust assets.3 Trust B is an irrevocable trust established by two settlors: the deceased spouse and the surviving spouse. In the case of an irrevocable trust established by two settlors, the FDIC provides separate insurance for the funds contributed by each settlor.
The methodology for determining the coverage for the funds in the account established for Trust B would be to deem the funds to be contributed in equal shares by the two settlors. Here we'll assume that the trust is funded with $1.5 million and that each settlor contributed one-half of that amount.
Funds Contributed by the Deceased Spouse. The surviving spouse would be one of the beneficiaries of Trust B. Under the trust, the surviving spouse would receive "a life estate interest." The settlors' four grandchildren and two children would be the other beneficiaries of Trust B. The surviving spouse's life estate interest would be an ascertainable, non-contingent trust interest under the FDIC's regulations because it could be calculated through the use of the present value/life expectancy tables in the Internal Revenue Code. See 12 C.F.R. § 330.1(l). The value of this interest would depend upon two factors: (1) the balance of funds ($750,000); 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, assuming that amount is less than $100,000, it would be fully insured. So, up to $100,000 of the $750,000 contributed by the deceased settlor to fund Trust B would be insured in connection with the life estate interest the surviving spouse has in Trust B. The interests of the other Trust B beneficiaries--the grandchildren and children--would not qualify as non-contingent interests, because the surviving spouse has the power to invade the trust corpus. As such, those interests would be insured to a combined limit of $100,000.
The Funds Contributed by the Surviving Spouse. The funds contributed by the surviving spouse also would be deemed to be $750,000. The surviving spouse him- or herself 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. 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 Internal Revenue Code. See 12 C.F.R. § 330.1(l). These 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 part of the trust assets. 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 amount 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.
As discussed in connection with the funds contributed by the deceased settlor, the interests of the other Trust B beneficiaries--the grandchildren and children--would not qualify as non-contingent interests, because of the power-to-invade provision in the trust. As such, those interests would be insured to a combined limit of $100,000, relative to both the deceased spouse's and the surviving spouse's contributions to Trust B.
Summary of Coverage for Trust B. The overall coverage available under Trust B would be: up to $100,000 as to the deceased spouse's contribution relative to the surviving spouse's life estate interest in the trust; up to $100,000 as to the surviving spouse's contribution relative to that person's life estate interest in the trust, assuming he or she has no funds at the bank insured under the single-ownership category; and up to $100,000 for the contingent interest of the other beneficiaries of the trust. The overall coverage of Trust B would be up to $300,000.
Also upon the death of the first spouse, Trust C will be created if the deceased spouse's separate property and 1/2 of the community property exceed the applicable federal estate tax exclusion amount. If created and funded, Trust C will be an irrevocable trust, paying net income to the surviving spouse for life; the surviving spouse will have the power to invade the trust. On the surviving spouse's death, the remaining balance in Trust C would be added to Trust B and distributed according to the terms of that trust.
As with the account established in connection with Trust B, an account established in connection with Trust C would be insured under the FDIC's irrevocable trust rules. Because the settlors and beneficiaries of this irrevocable trust are the same as those in Trust B, there would be no additional deposit insurance for this account. The irrevocable trust rules provide coverage on a per-settlor/per-beneficiary basis with a per-bank limit of $100,000 coverage for the total ascertainable, non-contingent interests a settlor has provided per beneficiary. So, no additional deposit insurance coverage would be provided for the trust interests created in Trust C.
Summary of Coverage When the First Settlor Dies
For the reasons explained above, the funds in revocable Trust A would be insured up to $600,000 and the funds in irrevocable Trusts B and C would be insured to a maximum of $300,000.
When Both Settlors Have Died
As you have indicated, when both settlors have died, all the funds will be in Trust B, an irrevocable trust. As such, insurance coverage would be determined based on the FDIC's irrevocable trust rules. The beneficiaries of Trust B are the settlors' four grandchildren and their two children. Because the trust assets will no longer be subject to a power to invade the trust corpus, all the interests would be considered ascertainable and non-contingent. Thus, coverage would be provided up to $100,000 for the interest of each beneficiary. The maximum coverage would be $1.2 million, or $100,000 per settlor, per beneficiary.
Summary of Coverage During the Different Stages of the Living Trust's Existence
When both settlors are alive, coverage could be up to $1.2 million. When the first settlor dies, coverage could be up to $900,000. And, when both settlors have died, coverage could be up to $1.2 million.
Please note that the FDIC's six-month rule would apply upon the death of the settlors of the living trust account(s). 12 C.F.R. 330.3(j). So, for example, upon the death of the first spouse, the living trust account would continue to be insured as if both settlors were still alive for six months after the date of that spouse's death. The same applies to the insurance coverage of the accounts after the death of the second spouse. They would continue to be insured as if the surviving spouse were still alive for six months after that spouse's death. The account owner(s) or trustee, however, may choose not to invoke the six-month rule if doing so would reduce the coverage otherwise available on the account(s).
I hope this is fully responsive to your questions. Feel free to call me at (202) 898-7349 with any additional questions or comments.
1We are assuming that, following the death of the first settlor, the trustee will establish a separate bank account for each separate sub-trust. Go back to Text
2The 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 review is limited to the beneficiaries named in the depository institution's deposit account records. Go back to Text
3The 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). 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"). Go back to Text