FDIC Federal Register Citations

Re: Comments on Proposed Rule to Clarify the Regulations on Insuring Living Trust Accounts

Dear Mr. Zamorski:

Thank you for allowing us to submit comments on the two alternatives under consideration.

The existing rules regarding FDIC coverage for the deposits owned by living trusts can be confusing and complicated. In order for the bank to help a customer understand if deposits are fully covered, a front-line employee, such as a customer service representative, must be able to read the living trust document and determine whether the language of the trust document puts conditions on the ability of a qualifying beneficiary to inherit a portion of the trust's assets.

This is asking an employee who is usually not an officer to read some fairly complicated language and make judgments that can affect the customer's well-being. This is also asking the bank employee to give advice to the customer. While the bank employee could refer the customer to his or her attorney for advice as to FDIC coverage, most customers are reluctant to seek legal advice and most lawyers probably will not take the time to research the FDIC rules to give sound advice. Furthermore, the customer wants to take care of the deposit at that moment and not wait until he or she can talk to an attorney and get an answer from the attorney. We have had attorneys tell their clients to ask the bank whether their accounts are covered by FDIC insurance. The bank customer is going to rely upon the customer service representative with whom the customer usually has a close, trusting relationship, having dealt with that representative of the bank for a number of years.

Therefore, the rules do need to be changed because there is not a quick or inexpensive way for a bank customer to be sure of FDIC coverage on living trusts. Even the FDIC's insurance coverage calculator on its web site does not give much help because the person entering the information onto the screens must be able to make legal judgments from the trust document.

The first alternative under consideration is to provide coverage up to $100,000 per qualifying beneficiary named in the living trust regardless of contingencies in the trust. This rule has the potential to allow more FDIC coverage because it covers each qualifying beneficiary of the trust regardless of whether there is any language of limitation in the document or not. Also, it simplifies the rules by making the rule for living trust coverage parallel to the rules for payable-on-death (POD) accounts. Thus, bank employees would find this rule less confusing and easier to explain because banks have had rules for POD accounts for several years. The drawback to this alternative is that, if a qualifying beneficiary of the living trust is also a beneficiary of a POD account at the same institution, there would be aggregation of that beneficiary's amounts for all POD accounts at the institution and the beneficiary's share of all living trust deposits of the same institution to determine if all deposits for that beneficiary are covered. The usual situation is that the bank's customer will have the same qualifying beneficiaries for its POD accounts as for the living trust; therefore, the living trust usually will not result in the ability to increase the total amount of FDIC coverage that a customer can have at the bank. This alternative just allows the customer to choose to have the deposits in the form of a living trust or a POD account or a combination of the two for the same insurance limits.

The second alternative under consideration is 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. This rule would have the potential to allow the most FDIC coverage because it will cover a living trust deposit account for $100,000, separate and apart from the grantor's other accounts and separate and apart from a qualifying beneficiary's coverage under POD accounts. This rule would also be the easiest for bank employees and customers to understand. This rule would remove the defeating condition if there is language of limitation in the trust document. The limitation of this rule would be that if a bank customer wants to use a living trust as an estate planning tool rather than POD accounts, the customer is limited to $100,000 additional FDIC coverage for the trust as a whole regardless of the number of qualifying beneficiaries, whereas in alternative one the customer could have $100,000 FDIC coverage for each qualifying beneficiary of the trust. This is only a limitation if the customer does not want to use POD accounts in combination with a living trust for bank deposits. Otherwise, this offers more coverage if used in combination with POD accounts.

Which proposed rule is better? There are situations where either would be better for the bank customer. However, alternative two is simpler and easier to understand and has the potential to offer customers the most FDIC coverage. Moreover, alternative two offers less potential for the bank employee being placed in a position of giving advice to a bank customer.

Very truly yours,

N. Houston Parks
Executive Vice President &
Senior Trust Officer
First Farmers and Merchants National Bank
Columbia, TN