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4000 - Advisory Opinions


Question regarding deposit insurance for a "Spousal Revocable Living Trust."

FDIC--05--05

September 12, 2005

Christopher L. Hencke, Counsel

You have requested advice about the insurance coverage of revocable "living trust" accounts at FDIC-insured depository institutions. Your inquiry involved the "A Spousal Revocable Trust" established by "B" and "C". Subject to the qualifications explained in this letter, an account in the name of the "A Spousal Revocable Trust" would be fully insured up to $550,000 while B and C are both alive. As explained below, however, the death of one or both of B and C would result in a substantial decrease in coverage.

Revocable Trust Accounts

The insurance coverage of revocable trust accounts is governed by 12 C.F.R. § 330.10. Under that section of the FDIC's regulations, accounts in the name of a revocable "living trust" are insured to each owner (also known as the "grantor" or "settlor" or "donor") up to $100,000 for the interest of each "qualifying beneficiary." See 12 C.F.R. § 330.10(f)(1); 12 C.F.R. § 330.10(a). The term "qualifying beneficiary" is defined as the owner's spouse, child, grandchild, parent or sibling. See 12 C.F.R. § 330.10(a). This "per qualifying beneficiary" coverage is separate from the coverage of the owner's single ownership accounts (i.e., accounts in the sole name of the owner with no beneficiaries) at the same insured depository institution.

While the interest of each qualifying beneficiary is insured separately up to $100,000, the interests of all non-qualifying beneficiaries are added together and insured up to $100,000 in aggregation with the owner's single ownership accounts. See 12 C.F.R. § 330.10(f)(2); 12 C.F.R. § 330.10(c).

The coverage described above is not available unless the title of the bank account reflects the fact that the funds in the account are held pursuant to a revocable trust. See 12 C.F.R. § 330.10(f)(4). This requirement can be satisfied by titling the account in the name of the trust (i.e., the "Spousal Revocable Trust").

In determining the ownership interest of each grantor in the care of a joint revocable trust (such as the trust in this case), the FDIC applies the following rule:Where [a revocable trust account] is established by more than one owner and held for the benefit of others, some or all of whom are within the qualifying degree of kinship, the respective interests of each owner (which shall be deemed equal unless otherwise stated in the insured depository institution's deposit account records) held for the benefit of each qualifying beneficiary shall be separately insured up to $100,000.

12 C.F.R. § 330.10(d). Under this rule, the FDIC would assume (in the absence of account records to the contrary) that the two grantors (B and C) have contributed equal amounts to any account in the name of the "A Spousal Revocable Trust." The amount contributed by each grantor for each "qualifying beneficiary" would be insured separately.

In determining the beneficial interest of each beneficiary, the FDIC applies the following set of rules:[Separate coverage for the interest of each qualifying beneficiary] will apply only if, at the time an insured depository institution fails, a qualifying beneficiary would be entitled to his or her interest in the trust assets upon the grantor's death and that ownership interest would not depend on the death of another trust beneficiary. If there is more than one grantor, then the beneficia- ry's entitlement to the trust assets must be upon the death of the last grantor. The coverage provided in this paragraph (f) [i.e., 12 C.F.R. § 330.10(f)] shall be irrespective of any other conditions in the trust that might prevent a beneficiary from acquiring an interest in the deposit account upon the account owner's death.For living trust accounts that provide for a life-estate interest for designated beneficiaries and a remainder interest for other beneficiaries, unless otherwise indicated in the trust, each life-estate holder and each remainder-man will be deemed to have equal interests in the trust assets for deposit insurance purposes.

12 C.F.R. § 330.10(f)(1); 12 C.F.R. § 330.10(f)(3).

Below, these rules are applied to a deposit account in the name of the "A Spousal Revocable Trust." For purposes of illustration, I have assumed that the balance of the account is $550,000.

The ``A Spousal Revocable Trust''

In determining the insurance coverage of a deposit account in the name of the "A Spousal Revocable Trust" (with an assumed balance of $550,000), the FDIC would rely on the terms of the trust agreement. Article 4 of the trust agreement provides that the trust funds1 --following the death of the last grantor--shall be distributed as follows:

• Immediately, $50,000 shall be paid to D (the grantors' grandniece) and $50,000 shall be paid to E (the grantors' daughter).

• During the lifetime of E, the income of the trust shall be paid to E. This right to receive lifetime payments is known as a "life-estate interest."2

• Following the death of E the residue of the trust shall be paid in equal shares to F (the grantors' grandson) and G (the grantors' granddaughter).3

Under the distribution scheme represented by these three bullet points, the grantors' beneficiaries (for deposit insurance purposes) are four in number: (1) grandniece D; (2) daughter E; (3) grandson F; and (4) granddaughter G.4 The first beneficiary (the grandniece) is a "non-qualifying beneficiary"; the others are "qualifying beneficiaries."

After determining the identities of the beneficiaries, the next step is to determine the amount of each grantor's contribution for each beneficiary. In determining these amounts, the FDIC would assume that each grantor has contributed 50% of the funds in the account. Thus, with an account balance of $550,000, the FDIC would assume that B has contributed $275,000 and that C has contributed $275,000. The funds contributed by B would be insured separately from the funds contributed by C.

Below, the coverage for each grantor is explained in detail.

The $275,000 Contributed by B

In determining the insurance coverage of the $275,000 contributed by B, the FDIC would allocate the funds to the four beneficiaries in accordance with the distribution scheme set forth in the trust agreement as summarized in the bullet points above.

In accordance with the first bullet point, the FDIC would allocate $25,000 to D and $25,000 to E. Though the trust agreement states that $50,000 (and not $25,000) shall be distributed to each of these beneficiaries, the FDIC would assume that only a 50% portion represents funds contributed by B. (The FDIC would assume that the other 50% portion represents funds contributed by C).

In accordance with the second bullet point, the FDIC then would calculate the amount of E's "life-estate interest" (i.e., the second bullet above). In making this calculation, the FDIC would subtract $50,000 (the distributions under the first bullet point by B to D and E) from $275,000 (the total funds contributed by B to the account). The difference is $225,000. Of this $225,000, the FDIC would treat one-third (i.e., $75,000) as the "life-estate interest" of E. This calculation of the "life-estate interest" is based upon the fact that the funds remaining after the death of E will be distributed to two beneficiaries: F and G. Under the FDIC's regulations, the "life-estate interest" of E is deemed equal to the "remainder interests" of F and G. Thus, the "life-estate interest" is deemed to be one-third of $225,000 or $75,000.

In accordance with the third bullet, the FDIC then would allocate the remaining funds in the amount of $150,000 to F and G. These funds would be allocated equally between these two beneficiaries because the trust agreement provides that these beneficiaries shall receive equal amounts. Thus, $75,000 would be allocated to F and $75,000 would be allocated to G.

Finally, the FDIC would aggregate the funds designated for E under the first bullet point ($25,000) with the funds designated for E under the second bullet point ($75,000). This aggregation produces a sum of $100,000, representing the total amount of funds contributed by B for E.

In summary, the contributions by B in the amount of $275,000 would be allocated among the four beneficiaries as follows:

D $ 25,000
E $100,000
F $ 75,000
G $ 75,000
  TOTAL $275,000

The contributions made by B for D warrant further discussion. As previously noted, D is not a "qualifying beneficiary." Therefore, the funds for D would be treated as B's single ownership funds. This means that the funds would be aggregated with B's single ownership accounts at the same insured depository institution (if any) and insured up to a limit of $100,000. See 12 C.F.R. § 330.10(f)(2). Assuming that B maintains no single ownership accounts (i.e., accounts in the sole name of B with no beneficiaries), the funds contributed for D in the amount of $25,000 would be fully insured.

Indeed, the funds contributed by B for each beneficiary (whether qualifying or non-qualifying) would be fully insured because the interest of each beneficiary would be $100,000 or less. The coverage is represented below:

Beneficiary Interest Insured Uninsured
D $ 25,000 $ 25,000 $ 0
E $100,000 $100,000 $ 0
F $ 75,000 $ 75,000 $ 0
G $ 75,000 $ 75,000 $ 0
 TOTALS $275,000 $275,000 $ 0

Though $275,000 would be fully insured, any contributions by B in excess of $275,000 would be partially uninsured because the excess contributions would push E's interest beyond the $100,000 limit. Also, excess contributions (depending upon the amount of the excess) could push the interests of F and G beyond the $100,000 limit.

The calculation of E's "life-estate interest" warrants further discussion. In some letters to depositors, the FDIC staff has suggested that the "life-estate interest" is calculated "first." Moreover, the FDIC staff has suggested that the "life-estate interest" is calculated by dividing the amount of a grantor's funds by the total number of trust beneficiaries. In this case, I have not calculated the "life-estate interest" of E first. Rather, I have calculated the "life-estate interest" after allocating funds to D and E under the first bullet point. Also, in calculating the "life-estate interest," I have divided the remaining funds not by four (the total number of trust beneficiaries) but by three (the number of beneficiaries who will receive funds under the second and third bullet points).

The difference between this case and the previous cases is the fact that the "A Spousal Revocable Trust," unlike the trust agreements in the previous cases, provides that certain funds shall be distributed prior to the death of the "life-estate interest" beneficiary. For this reason, the calculation of the "life-estate interest" cannot be first. Rather, the calculation of the "life-estate interest" must be second. Moreover, in calculating the "life-estate interest," the FDIC cannot treat D as a "remainder-man" because she will not receive a portion of funds remaining after the death of the "life-estate holder" (i.e., E). See 12 C.F.R. § 330.10(f)(3) (providing that "each life-estate holder and each remainder-man will be deemed to have equal interests in the trust assets"). On the contrary, D will receive her portion of funds prior to the distribution of the "life-estate interest."

In summary, for the reasons explained above, the contributions made by B would be fully insured up to $275,000.

The $275,000 Contributed by C

The $275,000 contributed by C would be insured in the same manner as the funds contributed by B. Thus, the funds would be fully insured.

While Both Grantors Are Alive

For the reasons explained above, an account in the name of the "A Spousal Revocable Trust" would be fully insured up to a total amount of $550,000 ($275,000 for B and $275,000 for C). This conclusion is based upon the assumption that neither B nor C holds any other testamentary revocable trust accounts at the same depository institution for the benefit of any of the same beneficiaries.5 Also, this conclusion is based upon the assumption that neither B nor C holds any single ownership accounts at the same depository institution.6

After One Grantor Has Died

Section 4.1 of the trust agreement provides that the trust shall continue in existence, without change, following the death of the first grantor. I construe this provision to mean that the trust shall become a revocable trust owned by one grantor (the survivor) for the benefit of the same beneficiaries. With only one grantor, the maximum insurance coverage of the trust would be reduced from $550,000 (as explained above) to $275,000.

The FDIC's regulations include the following rule: "The death of a deposit owner shall not affect the insurance coverage of the deposit for a period of six months following the owner's death unless the deposit account is restructured." 12 C.F.R. § 330.3(j). As a result of this "grace period," the reduction in coverage (from $550,000 to $275,000) would not take place until six months following the death of the first grantor.

After Both Grantors Have Died

Upon the death of the second grantor, the trust would become an irrevocable trust governed by 12 C.F.R. § 330.13. Under that section of the FDIC's regulations, "per beneficiary" coverage is not provided unless the interests of the beneficiaries are "non-contingent interests." See 12 C.F.R. § 330.13(a); 12 C.F.R. § 330.1(l). In many cases, the insurance coverage of an irrevocable trust account is limited to $100,000 because the interests of the beneficiaries are subject to contingencies. See 12 C.F.R. § 330.13(b).

Under section 4.3 of the trust agreement, the trustee will be authorized to invade the trust funds for the purpose of paying medical expenses (limited) and educational expenses (unlimited) for certain beneficiaries. The possibility that the trustee may invade the trust funds for these purposes means that the interests of the beneficiaries are contingent (i.e., contingent on the discretion of the trustee). Though this contingency is unimportant while the trust is revocable, this contingency will be very important when the trust becomes irrevocable. As a result of this contingency, the insurance coverage of an account in the name of the irrevocable trust will be limited to $100,000. Through the operation of the FDIC's "grace period," this reduction in coverage (from $275,000 to $100,000) would take place six months following the death of the last grantor.

Conclusion

For the reasons explained above, an account in the name of the "A Spousal Revocable Trust" would be fully insured up to $550,000 while both grantors are alive (subject to the qualifications detailed in this letter). This conclusion is based upon the trust agreement submitted for review. Any amendments to this trust agreement could affect the insurance coverage.

I hope that this information is useful.

1The trust agreement includes instructions for the disposition of trust funds as well as instructions for the disposition of personal property and real estate. The provisions dealing with personal property and real estate are irrelevant for FDIC purposes because the FDIC protects no trust assets except the funds in bank accounts. Go back to Text

2The trust agreement also provides that the trustee may invade principal for the purpose of paying E's medical expenses (up to $25,000). The FDIC views such discretionary distributions of principal as part of E's "life-estate interest" (discussed in greater detail infra). Go back to Text

3The payments to F and G consist of several parts. For example, the trustee may invade principal for the purpose of paying the medical expenses of F and G (up to $25,000). Also, the trustee may invade principal for the purpose of paying certain educational expenses (unlimited). At certain birthdays, the trustee is instructed to pay specified amounts. Finally, when G reaches the age of 30, the trustee is instructed to release the residue of the trust funds to F and G. For FDIC purposes, the important fact is that all funds, other than the funds to be distributed to D and E, will be distributed eventually to F and G (assuming that these two beneficiaries do not die prior to final distribution). Therefore, any funds not allocated to D and E may be allocated to F and G. Go back to Text

4The trust agreement also names H as a potential beneficiary. The agreement specifies, however, that H shall receive no funds unless other beneficiaries have died. In calculating the insurance coverage of revocable "living trust" accounts, the FDIC disregards any beneficiary whose interest is contingent upon the death of another beneficiary. See 12 C.F.R. § 330.10(f)(1). Go back to Text

5In applying the $100,000 insurance limit, the FDIC adds together all revocable trust funds of a grantor for a particular "qualifying beneficiary" even if the funds are placed in multiple revocable trust accounts at the same insured depository institution. See 12 C.F.R. § 330.10(a); 12 C.F.R. § 330.10(f). Go back to Text

6In applying the $100,000 insurance limit, the FDIC aggregates the revocable trust funds of a grantor for a "non-qualifying beneficiary" (such as D) with the grantor's single ownership accounts at the same insured depository institution. See 12 C.F.R. § 330.10(c); 12 C.F.R. § 330.10(f)(2). Go back to Text


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