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4000 - Advisory Opinions


Insurance Coverage of Revocable and Irrevocable Trust Accounts

FDIC-88-25

March 17, 1988

Claude A. Rollin, Attorney

This is in response to your letter of February 29, 1988 to Mr. Fredric Karr wherein you seek clarification of the rules governing deposit insurance of revocable and irrevocable trust accounts. Mr. Karr has transferred to a different section within the FDIC and he no longer responds to deposit insurance inquiries. Therefore, your letter has been referred to me for a response.

In your letter you set out three hypothetical trusts and you ask us to determine the maximum amount of deposit insurance that accounts established pursuant to those hypothetical trusts would be entitled to under FDIC regulations.

The first hypothetical trust arrangement is described in your letter as follows:

Husband and wife establish a revocable, inter-vivos trust with each acting as co-trustee. The trust provides that at the death of the first, the trust is split into two halves; one remaining revocable by the surviving spouse, and the other becoming irrevocable but with all of the income payable to the surviving spouse for his or her lifetime. At the death of the surviving spouse, the proceeds of each of the two shares of the original trust are distributed to the settlor's three children, if living, and if not, to a deceased child's issue per stirpes.

An account established pursuant to such a trust, during the lifetimes of the owners (i.e., the persons having power to revoke - in this case the settlors (husband and wife), would be a testamentary (revocable trust) account which evidences an intention that upon the death of the owner(s) (usually the depositor(s)) the funds will pass to a named spouse, child or grandchild of the owner(s). For such accounts, section 330.3 of the FDIC rules and regulations, 12 C.F.R. § 330.3, provides separate deposit insurance for each settlor, up to $100,000 per beneficiary. Since the hypothetical trust provides that upon the death of both settlors the trust funds pass to their three children, a revocable trust account established pursuant to the hypothetical trust would be insured up to $200,000 per beneficiary, for a total of up to $600,000, while the settlors are both alive. This account would be insured separately from any other individual or joint accounts which the settlors or beneficiaries may have with the same bank.

Upon the death of the first settlor (spouse), the trust assets are divided in half and placed into two separate trusts. The first is a revocable trust with the surviving spouse serving as both settlor and trustee of the trust for the benefit of the three children. An account established pursuant to this portion of the trust assets would qualify for the separate insurance coverage provided for testamentary trust accounts. Since the settlor (surviving spouse) would be holding the funds in trust for his/her children, a testamentary trust account would be deemed to exist and the account would be insured, up to $100,000 per beneficiary, for a total of up to $300,000. The second trust created upon the death of the first settlor is an irrevocable trust. Sections 330.1(c) and 330.10 of the FDIC rules and regulations, 12 C.F.R. § 330.1(c) and § 330.10, provide separate deposit insurance, up to $100,000 per beneficiary, for the interest of each beneficiary in the irrevocable trust's deposit accounts at any one insured bank, provided that interest is determinable without reference to any contingency other than life expectancy. Therefore, an account established pursuant to the irrevocable trust would be insured up to $100,000 per beneficiary, for a total of up to $300,000, if all the beneficial interests are so determinable.

The second hypothetical trust is outlined in your letter as follows:

Husband and wife establish a revocable, inter-vivos trust with each acting as co-trustee. The trust provides that at the death of the first, the trust is split into two halves; one remaining revocable by the surviving spouse, and the other becoming irrevocable but with all of the income payable to the surviving spouse for his or her lifetime. At the death of the surviving spouse, the proceeds of each of the two shares of the original trust are distributed to three designated friends of the settlors.

As noted above, separate deposit insurance is provided for testamentary trust accounts when the named beneficiary is within a certain degree of kinship (spouse, child or grandchild). If the beneficiary is not within the necessary degree of kinship, then the account is treated as being owned by the person having the power to revoke, the funds therein are added to any individual accounts of the settlor and the total is insured up to $100,000. Since the beneficiaries of the second hypothetical trust are three friends of the owners (not spouse, children or grandchildren), an account established pursuant to such a trust would not be entitled to any separate or additional coverage. Instead, the funds in the account would be treated as the settlors' own funds, they would be aggregated with any other jointly owned funds of the settlors, and the total would be insured up to $100,000.

Upon the death of the first settlor (spouse), the trust assets are distributed into two separate trusts (one half into each trust). One trust is revocable with the surviving spouse acting as the settlor and trustee of the trust for the benefit of three friends. For the reason cited in the preceding paragraph, an account established pursuant to a revocable trust which benefits friends or the settlor is not entitled to any separate deposit insurance. Therefore, the funds in such an account would be treated as the settlor's own funds, they would be added to any individual accounts of the settlor (surviving spouse) and the total would be insured up to $100,000. The second trust created upon the death of the first settlor is an irrevocable trust. As noted above, the determinable interests of each beneficiary in accounts established pursuant to irrevocable trusts are insured, up to $100,000 per beneficiary, separately from any other individual or joint accounts of the settlors or the beneficiaries. Therefore, an account established pursuant to the irrevocable trust would be insured up to $100,000 per beneficiary, for a total of $300,000 if all the beneficial interests are determinable.

The third hypothetical trust in your letter is described as follows:

Single settlor establishes a revocable living trust which is to be distributed at his death, one third to his daughter, one third to his son, and one third to the issue of a deceased son (two grandchildren).

An account established in accordance with this type of revocable trust would clearly be classified as a testamentary trust account entitled to separate insurance coverage since the beneficiaries are two children and two grandchildren of the settlor. Therefore, the account would be insured, up to $100,000 per beneficiary, for a total of up to $400,000. The insurance provided for this account would be separate from the insurance provided for any other accounts maintained by the settlor or the beneficiaries with the same insured bank.


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