FDIC Federal Register Citations

[Federal Register: June 30, 2003 (Volume 68, Number 125)]

[Proposed Rules]

[Page 38645-38651]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr30jn03-27]

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FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 330

RIN 3064-AC54

Deposit Insurance Regulations; Living Trust Accounts

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

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SUMMARY: The FDIC is publishing for notice and comment alternative

proposed rules to amend its deposit insurance regulations. The purpose

of the rulemaking is to clarify and simplify the regulations on the

insurance coverage of living trust accounts.

DATES: Written comments must be received by the FDIC not later than

August 29, 2003.

ADDRESSES: All comments should be addressed to Robert E. Feldman,

Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit

Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.

Comments may be hand-delivered to the guard station located at the rear

of the 550 17th Street Building (located on F Street) on business days

between 7 a.m. and 5 p.m. (fax number: (202) 898-3838; or send by email

to comments@FDIC.gov). Comments may be inspected and photocopied in the

FDIC Public Information Center, Room 100, 801 17th Street, NW.,

Washington, DC 20429, between 9 a.m. and 4:30 p.m. on business days,

and the FDIC may post the comments on its Internet site at

http://www.fdic.gov/regulations/laws/federal/propose.html

.

FOR FURTHER INFORMATION CONTACT: Joseph A. DiNuzzo, Counsel, Legal

Division (202) 898-7349; Martin W. Becker, Senior Receivership

Management Specialist, Division of Resolutions and Receiverships (202)

898-6644; or Kathleen G. Nagle, Supervisory Consumer Affairs

Specialist, Division of Supervision and Consumer Protection (202) 898-

6541, Federal Deposit Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

One of the FDIC's paramount goals in the area of deposit insurance

is to ensure that depositors and insured depository institution

employees understand the FDIC's deposit insurance rules. To that end,

in July 1998, after an extensive review of the existing rules for

deposit insurance coverage, the FDIC simplified its entire deposit

insurance regulations. Also, in April 1999, the FDIC amended the rules

for the insurance coverage of joint accounts and payable-on-death

accounts to make them more easily understood.

Despite the FDIC's efforts to simplify and clarify the deposit

insurance regulations, there is still significant public and industry

confusion about the insurance coverage of living trust accounts. At

recent depository institution failures there has been a

disproportionately high percentage of uninsured living trust deposits,

when compared to the percentage of uninsured deposits in other

categories of coverage. The FDIC receives numerous calls daily from

bankers, members of the public and industry representatives indicating

their misunderstanding of the coverage for living trust accounts. As

discussed below, the confusion among bankers and the public about the

insurance coverage of living trust accounts is understandable.

A living trust is a formal revocable trust created by an owner

(also known as a grantor) and over which the owner retains control

during his or her lifetime. Upon the owner's death, the trust generally

becomes irrevocable. A living trust is an increasingly popular probate

instrument designed to achieve specific estate and tax planning goals.

A living trust account is subject to the FDIC's insurance rules on

revocable trust accounts. Section 330.10 of the FDIC's regulations (12

CFR 330.10) provides that revocable trust accounts are insured up to

$100,000 per ``qualifying'' beneficiary designated by the owner of the

account. If there are multiple owners of a living trust account,

coverage is available separately for each owner. Qualifying

beneficiaries are defined as the owner's spouse, children,

grandchildren, parents and siblings (12 CFR 330.10(a)).

The most common type of revocable trust account is the ``payable-

on-death'' (``POD'') account, sometimes referred to as a Totten Trust

account, comprised simply of a signature card on which the owner

designates the beneficiaries to whom the funds in the account will pass

upon the owner's death. The per-beneficiary coverage available on

revocable trust accounts is separate from the insurance coverage

afforded to any single-ownership accounts held by the owner or

beneficiary at the same insured institution. That means, for example,

if an individual has at the same insured bank or thrift a single-

ownership account with a balance of $100,000 and a POD account (naming

at least one qualifying beneficiary) with a balance of $100,000, both

accounts would be insured separately for a combined amount of $200,000.

If the POD account names more than one qualifying beneficiary, then

that account would be separately insured for up to $100,000 per

qualifying beneficiary (12 CFR 330.10(a)).

Separate, per-beneficiary insurance coverage is available for

revocable trust accounts only if the account satisfies certain

requirements. First, the title of the account must include a term such

as ``in trust for'' or ``payable-on-death to'' (or corresponding

acronym). Second, each beneficiary must be either the owner's spouse,

child, grandchild, parent or sibling. Third, the beneficiaries must be

specifically named

[[Page 38646]]

in the deposit account records of the depository institution. And

fourth, the account must evidence an intent that the funds shall belong

unconditionally to the designated beneficiaries upon the owner's death

(12 CFR 330.10(a) and (b)).

As noted, the most common form of revocable trust account is the

POD account, consisting simply of a signature card. With POD accounts,

the fourth requirement for per-beneficiary coverage does not present a

problem because the signature card normally will not include any

conditions upon the interests of the designated beneficiaries. In other

words, the signature card provides that the funds shall belong to the

beneficiaries upon the owner's death. In contrast, many living trust

agreements provide, in effect, that the funds might belong to the

beneficiaries depending on various conditions.

The FDIC refers to such conditions as ``defeating contingencies''

if they create the possibility that the beneficiaries may never receive

the funds following the owner's death. In the presence of a defeating

contingency, the revocable trust account is not entitled to separate

insurance coverage. Rather, the funds are aggregated with the funds in

any single-ownership accounts held by the owner at the same insured

depository institution and insured to a combined limit of $100,000 (12

CFR 330.10(c) and (f)).

Living trust accounts started to emerge in the late 1980s and early

1990s. At that time, the FDIC responded to a significant number of

questions about the insurance coverage of such accounts, often times

reviewing the actual trust agreements to determine whether the

requirements for per-beneficiary insurance were satisfied. In the

FDIC's review of numerous such trusts, it determined that many of the

trusts included conditions that needed to be satisfied before the named

beneficiaries would become the owners of the trust assets. For example,

some trusts required that the trust assets first be used to satisfy

legacies in the grantor's will; the remaining assets, if any, would

then be distributed to the trust beneficiaries. Other trusts provided

that, in order to receive any benefit under the trust, the beneficiary

must graduate from college. Because of the prevalence of defeating

contingencies among living trust agreements and the increasing number

of requests to render opinions on the insurance coverage of specific

living trust accounts, in 1994 the FDIC issued ``Guidelines for

Insurance Coverage of Revocable Trust Accounts (Including `Living

Trust' Accounts)'' (FDIC Advisory Opinion 94-32, May 18, 1994). The

Guidelines, which were revised in April 1999 to reflect changes to the

regulations (adding parents and siblings as qualifying beneficiaries),

provide a general explanation of the insurance coverage for revocable

trust accounts and a detailed explanation of how those rules apply to

living trust accounts. The subject of defeating contingencies is

explained at length in the Guidelines. The Guidelines are available at

the FDIC's Web site, www.FDIC.gov, and are available upon request from

the FDIC.

As part of its overall simplification of the deposit insurance

regulations, in 1998 the FDIC revised Sec. 330.10 to include a

provision explaining the insurance coverage rules for living trust

accounts (12 CFR 330.10(f)). That provision includes a definition of

defeating contingencies.

Despite the FDIC's issuance of guidelines on the insurance coverage

of living trust accounts and its inclusion of a special provision in

the insurance regulations explaining the coverage of these accounts,

there still is significant public and industry confusion about the

insurance of living trusts accounts.

Time has shown that the basic rules on the coverage of POD accounts

are not adaptable to living trust accounts. The POD rules were written

to apply to signature-card accounts, not lengthy, detailed trust

documents. Because living trust accounts and PODs are subject to the

same insurance rules and analysis, depositors often mistakenly believe

that living trust accounts are automatically insured up to $100,000 per

qualifying beneficiary without regard to any terms in the trust that

might prevent the beneficiary from ever receiving the funds. Our

experience indicates that in a significant number of cases that is not

so. Because of the existence of defeating contingencies in the trust

agreement, a living trust account often fails to satisfy the

requirements for per-beneficiary coverage. Thus, the funds in the

account are treated as the owner's single-ownership funds and, after

being added to any other single-ownership funds the owner has at the

same institution, insured to a limit of $100,000. The funds in a non-

qualifying living trust account with more than one owner are deemed the

single-ownership funds of each owner, with the corresponding

attribution of the funds to each owner's single-ownership accounts.

The FDIC believes the rules governing the insurance of living trust

accounts are too complex and confusing. Under the current rules, the

amount of insurance coverage for a living trust account can only be

determined after the trust document has been reviewed to determine

whether there are any defeating contingencies. Consequently, in

response to questions about coverage of living trust accounts, the FDIC

can only advise depositors and bankers that they should assume that

such accounts will be insured for no more than $100,000 per grantor.

Otherwise, the FDIC suggests that the owners of living trust accounts

seek advice from the attorney who prepared the trust document.

Depositors who contact the FDIC about their living trust insurance

coverage are often troubled to learn that they cannot definitively

determine the amount of their coverage without a legal analysis of

their trust document. Also, when a depository institution fails the

FDIC must review each living trust to determine whether the

beneficiaries' interests are subject to defeating contingencies. This

often is a time-consuming process, sometimes resulting in a significant

delay in making deposit insurance payments to living trust account

owners.

II. Alternative Proposed Rules

To address this situation, the FDIC is proposing to simplify the

insurance coverage rules for living trust accounts. The FDIC has

identified what it believes to be two viable alternatives to address

the confusion surrounding the insurance coverage of living trust

accounts.

Proposed Rule--Alternative One

The first alternative for simplifying and clarifying the insurance

rules for living trust accounts would be to provide coverage up to

$100,000 per qualifying beneficiary named in the living trust

irrespective of defeating contingencies (``Alternative One''). As

explained above, currently both POD and living trust accounts are

insured as revocable trust accounts and thus are subject to the same

rules. Alternative One would retain this parallel treatment of POD

accounts and living trust accounts by continuing to provide per-

qualifying-beneficiary coverage, but no longer requiring that a

beneficiary's interest in a living trust be free from defeating

contingencies.

Any conditions in the trust document affecting whether a

beneficiary would ultimately receive his or her share of the trust

assets would be irrelevant. The FDIC would identify the beneficiaries

and their ascertainable interests in the trust from the depository

institution's account records and provide coverage on the account up to

$100,000 per qualifying beneficiary, subject to the same rules that now

apply to POD accounts. For example, a deposit account for a living

trust naming three

[[Page 38647]]

qualifying beneficiaries (with equal ownership interests in the trust)

would be insured up to $300,000, as long as the account is designated

as a living trust account and the beneficiaries and their respective

interests in the trust are indicated in the institution's deposit

account records. This coverage would be the same as that afforded to a

POD account with three qualifying beneficiaries.

Under Alternative One, as currently the case, the insurance

coverage provided for living trust accounts would be under the same

category of coverage as POD accounts. Thus, all funds that a depositor

holds in both living trust accounts and POD accounts naming the same

beneficiaries would be aggregated for insurance purposes. For example,

assume a depositor has a living trust account for $200,000 in

connection with a living trust naming his children, A and B. If the

depositor also has a $200,000 POD account naming A and B, the combined

coverage on the two accounts would be $200,000.

As with POD accounts, under Alternative One insurance coverage

would be provided up to $100,000 per qualifying beneficiary limited to

each beneficiary's ascertainable interest in the trust. Thus, if a

living trust provided that upon the grantor's death one qualifying

beneficiary received $125,000 and another qualifying beneficiary

received $75,000, the coverage on a corresponding living trust account

with a balance of $200,000 would be $175,000. The process would be to

identify the number of qualifying beneficiaries, determine each

beneficiary's ascertainable interest in the trust, and insure the

account up to $100,000 per such interest. Here the first qualifying

beneficiary has an ascertainable interest of $125,000. Based on that

beneficiary's interest in the trust, $100,000 of the balance in the

account would be insured and $25,000 would be uninsured. The second

qualifying beneficiary has an ascertainable interest of $75,000, all of

which would be eligible for coverage.

This methodology for determining living trust account coverage

would be consistent with existing rules. The FDIC's insurance

regulations now base the coverage for revocable trust accounts on the

beneficiaries' interests. Typically with POD accounts the beneficiaries

have an equal ownership interest in the account; thus, the rules

indicate that such ownership interests are deemed equal unless

otherwise specified in the institution's deposit account records. With

living trusts, beneficiaries commonly have different ownership

interests. For example, the trust might provide that beneficiary A

receives $50,000 and beneficiary B receives $100,000. In order for the

FDIC to determine the insurance coverage for living trust accounts, it

is important that the institution's deposit account records indicate

each beneficiary's ownership interest in the trust. Thus, the proposed

rule expressly requires that the deposit account records of the

institution indicate the ownership interest of each beneficiary in the

living trust. The information could be in the form of the dollar amount

of each beneficiary's interest or on a percentage basis relative to the

total amount of the trust assets. If such information is not provided

in the institution's records, the FDIC would have the discretion to

review the living trusts upon a depository institution's failure to

obtain the necessary information, but this review process would

substantially slow the payment of insured deposits to living trust

account holders.

Because a living trust sometimes provides for different levels of

beneficiaries whose interests in the trust depend on certain

conditions, in some situations it might be infeasible to identify and

indicate in a depository institution's records the ownership interest

of each beneficiary. For example, a living trust might provide that,

upon the grantor's death, the grantor's spouse receives all of the

trust assets; but, if the spouse predeceases the grantor, then the

grantor's two children each receives fifty percent of the trust assets.

The FDIC requests specific comment on how this situation should be

treated under Alternative One. One option would be for the FDIC to deem

each beneficiary to have an equal share in a trust that provides for

multi-tiered beneficiaries.

Under Alternative One, as now with POD accounts, insurance coverage

would be affected by the existence of non-qualifying beneficiaries in

the living trust. The current rule is that the trust interest

attributable to a non-qualifying beneficiary is considered the

grantor's single-ownership funds and, along with any other single-

ownership funds held by the owner at the institution, insured to a

combined limit of $100,000. For example, a deposit account with a

balance of $300,000 held in connection with a living trust naming the

grantor's two children and nephew as beneficiaries would be insured up

to $200,000 as to the living trust account. The $100,000 attributed to

the non-qualifying beneficiary (the nephew) would be considered the

grantor's single-ownership funds. If the grantor has no other single-

ownership funds at the institution, the $100,000 attributed to the non-

qualifying beneficiary in the living trust account would be fully

insured under the single-ownership account category. If in this

example, however, the grantor also has a single-ownership account with

a balance of $50,000, then that amount would be added to the $100,000

from the living trust account (attributable to the non-qualifying

beneficiary) and insured to a combined limit of $100,000. Thus, overall

the depositor's funds would be insured for $300,000 and uninsured for

$50,000. Both examples would yield the same result as a similar POD

account with non-qualifying beneficiaries. As currently required for

all revocable trust accounts, the depository institution's deposit

account records would have to indicate the names of all the trust

beneficiaries.\1\

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\1\ The treatment also would be the same for PODs and living

trust accounts where there are no non-qualifying beneficiaries named

in the trust, but the balance in the account exceeds the maximum

available coverage. For example, if a grantor has a $200,000 living

trust account and there is only one qualifying beneficiary named in

the trust (and no non-qualifying beneficiaries), the coverage would

be limited to $100,000. As under current rules, the excess $100,000

would be uninsured. The result would be the same for a POD account

where the account balance exceeds the maximum insured amount

determined by the number of qualifying beneficiaries.

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The FDIC believes Alternative One would be an easily understood

rule on the insurance coverage of living trust accounts. Coverage would

no longer depend on defeating contingencies in the trust; thus,

depositors would have a clear understanding of their account coverage.

Also, assuming depository institutions' records contain the living

trust information required under Alternative One, the FDIC would be

able to make expeditious payments to insured depositors when an

institution fails.

Under Alternative One, in making deposit insurance determinations

upon an institution failure, the FDIC would rely primarily on a

depository institution's deposit account records to identify living

trust beneficiaries and their interests in the trust. As under current

procedures, the FDIC would request living trust account holders to sign

an affidavit on whether the identified beneficiaries are qualifying

beneficiaries (i.e., the grantor's spouse, child, grandchild, parent or

sibling) for purposes of determining the amount of deposit insurance.

In order to identify possible errors in institution documentation and

to avoid potential fraud, the FDIC also would review a percentage of

the living trusts underlying the respective living trust accounts.

[[Page 38648]]

Current FDIC rules do not require that the institution's records

indicate the kinship relationship between a revocable trust account

owner and the trust beneficiaries. In this regard the rules require

only that the beneficiaries be named in the institution's deposit

account records. As indicated, when an institution fails the FDIC

requests a revocable trust account depositor to provide an affidavit

specifying the relationship between the owner and each beneficiary,

indicating whether those individuals are qualifying beneficiaries. In

order to avoid the delay in paying claims caused by having depositors

provide such an affidavit when an institution fails, one option would

be for the FDIC to require institutions to obtain beneficiary

relationship information when a depositor opens or amends a living

trust or POD account. At that time the depositor would sign an

affidavit indicating whether each beneficiary is a qualifying

beneficiary. This additional information would further expedite

payments to living trust and POD depositors when an institution fails,

but would impose an additional recordkeeping requirement on depository

institutions. The FDIC seeks specific comment on this option.

One consequence of Alternative One is that it likely would result

in an increase in deposit insurance coverage. The reason is that,

unlike under the current rules, beneficiaries would not have to have an

unconditional interest in the trust in order for the account to be

eligible for per-qualifying-beneficiary coverage. For example, assume a

trust provided that upon the grantor's death the grantor's spouse would

receive $100,000 and each of the grantor's three children would receive

$100,000, but only if each graduated from college by age twenty-four.

Under Alternative One, the amount of coverage would be up to $400,000.

Under the current rules, because of the defeating contingency that each

of children graduates from college by age twenty-four, the maximum

coverage would be limited to $100,000. As indicated in the table below,

based on a sampling of accounts at recent depository institution

failures, FDIC staff found that under Alternative One there would have

been an increase in insured living trust deposits.

It is uncertain the extent to which Alternative One as a final rule

would increase the overall volume of insured deposits in the depository

institutions industry. One reason for the uncertainty is that no

industry-wide data are maintained on this type of deposit account.

Thus, it is unclear what, if any, effect an increase in insured living

trust deposits resulting from the issuance of Alternative One as a

final rule would have on the Bank Insurance Fund (``BIF'') and Savings

Association Insurance Fund (``SAIF'') reserve ratios. The reserve

ratios are determined by dividing the BIF and SAIF fund balances by the

estimated insured deposits held by BIF and SAIF members, respectively

(12 U.S.C. 1817(l)).

Proposed Rule--Alternative Two

The second alternative to address the confusion surrounding the

insurance coverage of living trust accounts is, in essence, to create a

separate category of coverage for living trust accounts and to insure

such accounts up to $100,000 per owner of the account (``Alternative

Two''). That individual would be insured up to a total of $100,000 for

all living trust accounts he or she has at the same depository

institution, regardless of the number of beneficiaries named in the

trust, the grantor's relationship to the beneficiaries and whether

there are any defeating contingencies in the trust. The deposit

insurance coverage for a living trust account would be separate from

the coverage afforded to any single-ownership accounts the owner may

have at the same depository institution. In addition, if that

individual also has a POD account, that account would be eligible for

separate, per-beneficiary POD coverage, regardless of the existence of

the living trust account (assuming the requirements for POD coverage

are met). Where there are joint owners of a living trust account, the

account would be insured up to $100,000 per grantor. Such insurance

would be separate from the available joint and single-ownership

coverage of each grantor.

For example, a depositor with $100,000 in a living trust account,

$100,000 in a POD account (naming a qualifying beneficiary) and

$100,000 in a single-ownership account would be fully insured as to

each account (assuming compliance with the applicable procedural

requirements). Under Alternative Two the coverage on a living trust

account would be separate from a depositor's coverage on other

categories of accounts, such as POD and single-ownership accounts.

The FDIC believes Alternative Two would make the deposit insurance

rules for living trust accounts simple and easy to understand. With

this knowledge, depositors would be able to make informed decisions on

how to obtain the maximum insurance coverage on living trust accounts.

In addition, depository institutions would not have to indicate in

their deposit account records the names of the trust beneficiaries and

their trust interests.

Also, under this proposal the FDIC would be able to pay insured

living trust account holders expeditiously when an institution fails.

Currently a significant percentage of living trust depositors must each

produce their living trust for FDIC review upon a depository

institution failure. This process delays the payment process and

sometimes results in privacy concerns raised by depositors. Alternative

Two would eliminate these issues because the FDIC would no longer need

to review the living trust to determine the names of the beneficiaries

and their ascertainable interests in the trust.

One consequence of this proposal is that it likely would result in

reduced coverage for trust account owners with living trusts naming

more than one qualifying beneficiary. For example, currently an account

for a living trust with one grantor and three qualifying beneficiaries,

with no defeating contingencies, would be eligible for coverage up to

$300,000. Under Alternative Two coverage on the account would be

limited to $100,000. As indicated in the table below, based on a

sampling of accounts at recent depository institution failures, FDIC

staff found that under Alternative Two there would have been a decrease

in insured living trust deposits.

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Table 2.--Sampling of Accounts Under Alternative Two