4000 - Advisory Opinions
Deposit Insurance, Sections 330.2 and 330.3; Terms of Time Deposit Contracts
December 23, 1987
Roger A. Hood, Assistant General Counsel
This is in response to your memorandum of December 3 in which you raise several questions about deposit insurance.
The insurance regulation (12 C.F.R. § 330.3) provides separate and additional insurance for an individually owned testamentary account that is payable on the death of the owner to his or her "spouse, child or grandchild", but neither the regulation nor a germane statute defines these terms for this purpose. The word "child", in its ordinary, or dictionary, meaning, and in its primary meaning as a legal term, includes an adopted child and a child born out of wedlock, as well as a natural child born in wedlock, but not a stepchild. However, for several years past, a number of opinions have been issued by the Legal Division holding that a stepchild is a "child" (and a stepgrandchild is a "grandchild") for the purposes of testamentary account deposit insurance--a position taken also by the FSLIC--and, in my opinion, we should adhere to this position until such time as the regulation is revised. The unique result is that, until the regulation is revised, a stepchild can be a qualifying beneficiary on a testamentary account owned by a stepparent, as well as on such an account owned by a natural parent. A natural parent of a child that has been given up through adoption cannot claim that child as a qualifying beneficiary for testamentary account deposit insurance purposes, but the adoptive parent can do so.
The insurance regulation (12 C.F.R. § 330.2) provides that funds owned by a minor and (as is permitted by the laws of some states in the case of minors of a specified minimum age) deposited in the minor's own name, or deposited by another in his or her own name in a representative capacity for the benefit of the child, are added together and insured to $100,000 in the aggregate. The crucial requisite for this insurance coverage, of course, is that the funds be actually owned by the minor, and the FDIC would ordinarily require evidence to establish that fact, lest such accounts be established as a sham in an effort to increase deposit insurance coverage. This requirement might be met, for example, by showing that the funds were a gift made in conformity with a "Uniform Gifts to Minors Act", per the regulation, or by a showing that the funds were inherited by the minor, or awarded to the minor in a lawsuit, and such like. It is, in short, not enough for these purposes for an account merely to be established by a parent, for example, for the alleged benefit of a minor owner, whether or not the minor is old enough under state law to hold the funds directly and to execute a signature card.
The right of the owner of a time deposit to withdraw the funds prior to maturity, and the right of the bank to exact a penalty for early withdrawal, are governed by the deposit contract. If a time deposit owner wishes to have such a right in the event the bank becomes uninsured, he or she should see that it is provided for in the contract. (Otherwise, the depositor's resort, essentially, would be to contend in litigation that the bank's retention of deposit insurance constitutes an implied condition of the deposit contract under state law, with the outcome being generally uncertain.)
A bank that assumes a deposit as a result of a merger (or similar transaction) stands in the contractual shoes, as it were, of the bank that originated the deposit and cannot unilaterally alter the (interest rate or other) terms of the deposit contract (nor can the depositor).