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4000 - Advisory Opinions


Explanation of Changes in Trust Insurance Coverage Under FDICIA

FDIC-92-98

December 28, 1992

Adrienne George, Attorney

Re:  Critique of Trust Portion of New York Times Article

Pursuant to our recent telephone conversations, I am providing my criticism of the trust portion of Michael Quint's article which appeared in the November 11, 1992 New York Times. It is my understanding that you have already contacted Claude Rollin for his comments on the rest of the article.

In his article, Michael Quint wrote:

In another change, coverage for money held in trust by a bank is combined with coverage for other accounts. In the past, coverage for trustee funds was separate from other coverage.

New York Times, November 11, 1992.

The above statement is incorrect. Before the Federal Deposit Insurance Corporation Improvement Act of 1991 (FDICIA), the FDIC allowed two kinds of separate insurance coverage for a revocable trust having a bank as trustee. First, section 7(i) of the Federal Deposit Insurance Act (FDI Act) provided that the deposits of a revocable trust with a bank as trustee would be separately insured from the deposits of another revocable trust with the same terms but with an individual as trustee, when deposits in both trusts were held at the same insured depository institution. Second, the deposits of a revocable trust with a bank as trustee would be separately insured from other kinds of accounts held at the same bank, provided that those other accounts were held in a different "right and capacity" from the revocable trust account. For example, if a grantor--the person who established the trust-- was using the trust to give a vested trust interest to a beneficiary who was his spouse, child or grandchild--that is, to a "qualifying beneficiary"--that interest would be separately insured from the grantor's individually-owned account, and also from a joint account

which that grantor owned with his wife. Also, that trust interest would be separately insured from the beneficiary's individually-owned account, and from a joint account which that beneficiary held with his wife at the same bank.

Similarly, before FDICIA, there were two kinds of separate insurance coverage for an irrevocable trust with a bank as trustee. First, section 7(i) of the FDI Act provided that the deposits of an irrevocable trust with a bank as trustee would be separately insured from the deposits of another irrevocable trust with the same terms but with an individual as trustee, when deposits in both trusts were held at the same insured depository institution. Second, the deposits of an irrevocable trust with a bank as trustee would be separately insured from other kinds of accounts held at the same bank, provided that those other accounts were held in a different "right and capacity" from the irrevocable trust account. For example, if a grantor was using his irrevocable trust to give a noncontingent trust interest to a beneficiary--in the case of an irrevocable trust, the beneficiary need not be limited to his spouse, child or grandchild--that interest would be separately insured from the grantor's individually-owned account, and from a joint account which that grantor owned with his wife. Also, that trust interest would be separately insured from the beneficiary's individually-owned account, and from a joint account which that beneficiary held with his wife at the same bank. I should add that revocable trusts without a bank as trustee, and irrevocable trusts without a bank as trustee, are also frequently entitled to separate insurance coverage from other kinds of accounts held by the grantor (and beneficiaries) on the basis of separate right and capacity.

What FDICIA did--and this change will not become effective until December 19, 1993--was to say that section 7(i) of the FDI Act would be changed to give only irrevocable trusts with a bank as trustee separate insurance coverage on the basis of the FDI Act's section 7(i). Thus, FDICIA provides that revocable trusts with a bank as trustee will no longer receive separate insurance coverage under 7(i), but they may still qualify for separate insurance coverage because they are being held in a separate right and capacity from the grantor's (and beneficiaries') other accounts. This change means that, when funds for two identical revocable trusts, one with a bank as trustee and the other with an individual as trustee, are deposited in the same bank, these funds will be added together for insurance purposes--that is, they will not be separately insured from one another. However, the funds of these revocable trusts, added together, may still qualify for insurance coverage that is separate from the coverage allotted to other kinds of accounts held by the grantor and qualifying beneficiaries, on the basis of separate right and capacity.

Thus, the change wrought by FDICIA on the insurance of trusts is far from the global, all-encompassing change which Michael Quint describes in the statement quoted above.

I hope that this critique will be useful to you. If I can be of any further help, I can be reached at (202) 898-3859.


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