4000 - Advisory Opinions
Deposit Insurance Coverage of Usufruct Accounts in Louisiana
August 26, 1987
Roger A. Hood, Assistant General Counsel
Patti C. Fox, Attorney
By letter dated January 6, 1987, former Regional Attorney Robert McPherson requested a legal opinion on the insurability of usufruct accounts pursuant to an inquiry by the Louisiana Office of Financial Institutions. We have determined that usufructs made in favor of a surviving spouse should, for deposit insurance purposes, be treated as a trust under section 330.10 of FDIC regulations. The usufructuary's interest would thus be valued as a life estate, and the naked owner's interest as a remainderman based on the applicable Federal Estate tax tables referenced in Section 330.1(c)(1).
Enclosed is a memorandum by Patti Fox discussing the issues raised by the State's inquiry. Please do not hesitate to contact me or Ms. Fox if you have any further questions.
The Louisiana Office of Financial Institutions (the "State") has requested a legal opinion regarding the insurability of usufruct accounts in which the surviving spouse is named as usufructuary and the descendants as naked owners. ***
A usufruct deposit account appears most analogous to an irrevocable trust arising either by operation of law or by instrument. Insurance coverage for the named beneficiaries would be determined by who was entitled to actual possession of the funds at the time the bank failed.
Article 477 of the Louisiana Civil Code defines ownership as "the right that confers on a person direct, immediate, and exclusive authority over a thing. The owner of a thing may use, enjoy, and dispose of it within the limits and under the conditions established by law." This provision contemplates that a person may have a qualified ownership interest in a thing as opposed to absolute ownership. Usufructs consist of two imperfect ownership rights, each held by a usufructuary and a naked owner. Taken together, both imperfect rights confer absolute ownership.
A usufruct is "a real right of limited duration on the property of another. The features of the right vary with the nature of the things subject to it as consumables or nonconsumables." La. Civ. Code art. 535. The usufructuary has the right of use and enjoyment of the property for a limited time, usually for life. The naked owner enjoys title to the property and may alienate or encumber the property subject to the usufruct, but in doing so cannot interfere with the right of the usufructuary. La. Civ. Code art. 603, 605.
Since money is a thing which cannot be used without being expended, a deposit account would be the subject of a consumable usufruct. See La. Civ. Code art. 536. The usufructuary becomes the owner of the consumables and may consume, alienate, or encumber them. "At the termination of the usufruct he is bound to pay to the naked owner either the value that the things had at the commencement of the usufruct or deliver to him things of the same quantity and quality." La. Civ. Code art. 538. Comment (c) to Article 538 indicates that Louisiana courts have consistently required the usufructuary to restore the value that the things had at the commencement of the usufruct. In essence, the usufructuary of a consumable usufruct possesses a qualified ownership which does not exclude the rights others may possess or enjoy upon termination of the usufruct. See Stewart v. Usry, 399 F.2d 50, 55 & n.11, 56 (5th Cir. 1968). The usufruct in favor of a surviving spouse creates "dual but separate interests in property. . .which taken together comprise all the attributes of ownership, but this ownership, does not by virtue of the interests passing from the decedent to the surviving spouse, vest in the spouse." Id. at 57, 58 (emphasis added).
Section 330.1(a) of FDIC regulations provides for consideration of rules of local law in determining the right and capacity in which a depositor holds an account. Based on consideration of the Civil Code and interpretative case law, ownership by title lies with the naked owner. From a practical standpoint, the usufructuary has possession of the funds in the account during the term of the usufruct; the naked owner, although named as a co-owner on the account, does not possess withdrawal rights and cannot interfere with the usufructuary's use of the funds. Therefore, no joint account has been established under section 330.9.
Nor has a revocable testamentary account been created under section 330.3 because neither the usufructuary nor the naked owner has the right of revocability. The funds on deposit derived from the estate of deceased spouse either by operation of law, i.e., the deceased died intestate, or under a will. Louisiana inheritance laws favor the heirs, but grant the surviving spouse a one-half interest in all marital community property, with a usufruct over the other half. At the termination of the usufruct, full ownership vests in the naked owner. Therefore, the usufructuary cannot vary the rights of the naked owner by revoking a testamentary deposit trust account. Nor can the Civil Code be interpreted as evidencing an intention that on the usufructuary's death the funds will pass to the named beneficiary (the naked owner). The intent to pass the funds to the naked owner arises by operation of law prior to the creation of the usufruct and, thus, prior to the usufructuary's interest in the funds.
The account does not qualify as an individual account under section 330.2, because the funds are owned by the usufructuary and the naked owner, although enjoyment of those funds is delayed in the case of the naked owner.
Usufruct accounts in favor of a surviving spouse are more analogous to an irrevocable trust under section 330.10, whether the usufruct arises by operation of law or through a will. The interest of the beneficiary with possession of the funds would be insured to $100,000.
Section 330.1(c)(4) defines "trust interest" to be a beneficial interest in an irrevocable express trust whether created by trust instrument or statute, excluding any interest retained by the settlor. In the case of a surviving spouse usufruct, no remainder interest in the settlor exists. Once established, the usufruct appears to be irrevocable; the rights of the usufructuary and the naked owner cannot be terminated at the will of either beneficiary, but are fixed by the Civil Code. Despite the fact that the naked owner is not entitled to the use and enjoyment of the funds until the usufructuary's right terminates, he is nevertheless a beneficiary of the usufruct with title to all the funds.
Section 330.1(c)(1) provides that trust interests must be allocable, without the evaluation of contingencies, except for those covered by the present worth tables as set forth in the Federal Estate Tax regulations at 26 C.F.R. §§ 20.2031-7. The usufructuary's interest can be compared to a life estate under common law, and the naked owner's to that of a remainderman. Notwithstanding that the naked owner is, in fact, entitled to all the funds initially subject to the usufruct, and may seek an accounting from the usufructuary's estate at termination of the usufruct, deposit insurance coverage is only concerned with the funds on deposit at the time a bank closes. It appears equitable to treat the partial ownership interests of both owners in the same manner as a life estate with remainder interest; thus, a valuation of the allocable interest of the naked owner can be made based on the Federal Estate Tax tables.
The question of insurance coverage of usufructs could be settled by viewing the account as a trust, arising by operation of law or instrument. In addition, beneficial interests under an irrevocable express trust are separately insured from other deposits accounts of the beneficiary.