4000 - Advisory Opinions
Irrevocable Trusts and Usufructs
November 2, 1987
Patti C. Fox, Attorney
I apologize for the delay in responding to your letter of August 17th regarding the insurability of deposit accounts subject to a usufruct in favor of a surviving spouse under Louisiana law. The FDIC has only recently had the occasion to make a determination of the coverage for such accounts in connection with another case.
The FDIC has concluded that accounts subject to a usufruct in favor of a surviving spouse are similar to an irrevocable trust arising either by operation of law or by instrument. Accordingly, the insurance coverage of these accounts will be determined by section 330.10, "Trust Accounts," and section 330.1(c), "Valuation of trust interests." Section 330.10 provides that the trust interests of the same beneficiary deposited into deposit accounts established under valid trust agreements created by the same settlor will be added together and insured to $100,000. A beneficiary's interest is separately insured from other deposit accounts owned by him or her. "Trust interest" is defined as "the interest of a beneficiary in an irrevocable express trust, whether created by trust instrument or statute, but does not include any interest retained by the settlor." 12 C.F.R. § 330.1(c)(4).
In applying the foregoing, the FDIC has determined that both the usufructuary and the naked owner have a beneficial interest in the account. The usufructuary has the right to the use and enjoyment of the funds during the terms of the usufruct. The naked owner, on the other hand, retains title to the funds and appears as co-owner on the account, but has no right to use and enjoyment until termination of the usufruct. The rights of absolute ownership -- possession and title -- are divided between the usufruct and the naked owner. Moreover, the rights of both parties are fixed by the Louisiana Civil Code and cannot be terminated at will, and thus appear to be irrevocable.
The usufructuary's interest can be compared to a life estate and the naked owner's to that of a remainderman under the common law treatment of trusts. 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 of the Federal Estate Tax regulations at 26 C.F.R. §§ 20.2031-7. A valuation of the allocable life estate and remainder interests of each beneficial owner can be made based on the Federal Estate Tax tables.
In the example you posed, Mrs. *** is appointed usufructuary of the deposit account; her three children are named as naked owners. All parties would be treated as beneficial owners of the funds with each separately insured to $100,000 based on the amount of his or her interest in the account. The children's remainder interests would be valued under the Federal Estate Tax rules previously cited.