| August 29, 2003
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street N.W.
Washington, D.C. 20429
Attention: Comments/Legal ESS
Re: Proposed Deposit Insurance Coverage for Revocable Living Trust
Accounts
Dear Mr. Feldman,
These comments are being submitted on behalf of almost 400 Missouri
banks and savings and loan associations by the Missouri Bankers
Association (MBA), a Missouri trade association. The MBA is responding
to the proposal by the Federal Deposit Insurance Corporation (“FDIC”) to
simplify the deposit insurance rules for living trust accounts.
FDIC’s proposal is in response to existing confusion about the
coverage of living trust accounts. The cause of this uncertainty is the
current requirement that beneficiaries of such trusts unconditionally
own the funds upon the owner’s death without any qualifications or
defeating contingencies. Because many written living trusts provide that
the funds might belong to the beneficiaries upon the owner’s death, such
accounts do not qualify for per-beneficiary coverage. Instead, the funds
are insured as the individual funds of the owner and are added to any
other of the owner’s individually owned accounts at the same
institution.
FDIC has proposed two alternatives to simplify the deposit insurance
coverage for living trust accounts. Alternative One would provide
$100,000 of insurance per qualifying beneficiary whether or not the
living trust documents contain defeating contingencies. Alternative Two
would provide $100,000 of insurance per owner of the account. In both
cases, defeating contingencies would no longer be a factor in
determining insurance coverage. Both alternatives would require
depositors to certify the existence of a revocable living trust at
account opening. Alternative One would further require that the kinship
relationships and the ownership interests of the beneficiaries be
specified in the deposit account records.
Members of the MBA support Alternative One, but only with significant
modification to the recordkeeping requirements. Our members believe that
Alternative One would be readily understood by depositors, while at the
same time preserving the ability of financial institutions to retain
deposits exceeding $100,000 because of the expanded per-beneficiary
coverage. Unlike Alternative Two, it avoids the need to change the
deposit insurance treatment of existing living trust accounts to conform
to a new rule while at the same time adding confusion for our members
depositors. Finally, the certification requirement in both alternatives
poses significant legal and practical problems.
The most common type of revocable trust account is the
payable-on-death account that generally consists only of the statement
in the deposit account records of the financial institution that the
funds go to specifically named qualifying beneficiaries upon the account
owner’s death. Qualifying beneficiaries are spouses, children,
grandchildren, parents, or siblings. Payable-on-death accounts must also
satisfy the requirement for no defeating contingencies; however, because
there is no formal trust document, this is not a bar to per-beneficiary
insurance coverage of these types of informal revocable trust accounts.
By contrast, formal revocable living trusts, which have become more
and more popular of late, are formal written trusts that may contain
defeating contingencies, such as providing that a beneficiary will
receive the funds once he or she attains a certain age.
Alternative One. The first alternative would provide coverage for
formal revocable living trusts that parallels the current treatment of
payable-on-death accounts. To qualify, the account owners would have to
have named specific, qualifying beneficiaries to receive the funds upon
the owners’ deaths. Under this alternative, if an account owner had both
payable-on-death accounts and revocable living trust accounts naming the
same beneficiaries, the funds would be aggregated and receive $100,000
per-beneficiary treatment.
Alternative One would require that the institution’s deposit account
records: 1) indicate in the account title that the funds are held
pursuant to a formal revocable trust; 2) certify the existence of a
living trust; and 3) name the beneficiaries of the living trust and
their ownership. Finally, the proposal seeks comment on whether the
deposit account records should contain beneficiary kinship relationships
to expedite insurance payouts.
Alternative Two. The second alternative would establish a new
category of coverage for formal revocable living trusts and insure such
accounts on a per-account owner basis. Each owner of such accounts would
be eligible for up to $100,000 of insurance. As with Alternative One,
this version would require that the institution’s deposit account
records: 1) indicate in the account title that the funds are held
pursuant to a formal revocable trust; and 2) certify the existence of a
living trust. FDIC believes Alternative Two would also expedite payouts
to depositors in failure situations because the agency would no longer
need to determine the names of beneficiaries and their ascertainable
interests in the trust documents.
As noted above, MBA supports Alternative One because we believe that
consumers will readily understand the coverage rules. In fact,
eliminating the prohibition on defeating contingencies is likely to
conform the coverage rules to the expectations (whether or not
justified) of existing depositors that their accounts will receive
per-beneficiary coverage.
By contrast, having to explain the change in coverage to existing
living trust account owners is sure to generate significant confusion.
Additionally, Alternative One will preserve the ability of financial
institutions, particularly community banks, to retain deposits in excess
of the insurance limit because of the expanded per-beneficiary coverage.
Recordkeeping Requirements. As discussed below, MBA opposes the
requirement that the institution’s account records certify the existence
of a living trust (in both alternatives) and include beneficiary
information.
First, a number of state laws provide statutory protection from
liability for third parties when dealing with trustees, so long as the
third party does not have actual knowledge that the trustee is exceeding
or improperly exercising trust authority. However, if depository
institutions were to comply with the proposed recordkeeping
requirements, it could be argued that they have imputed knowledge of the
trusts and thereby lose the protections afforded by the statute. If an
institution is determined to have actual knowledge, it could be held
liable by beneficiaries to act in accordance with the terms of the
trust. Although it is common practice in some states to retain a copy of
the front and back pages of a living trust, that clearly is not the case
in all states. Moreover, as discussed below, MBA strongly believes that
FDIC would still have to verify the existence of a living trust and
current beneficiaries when they close an institution, thereby negating
any need for such information at account opening.
MBA believes there are compelling practical reasons that FDIC should
not rely on deposit-account records when closing an institution. First,
unlike payable-on-death accounts for which the only document is the
institution’s account-opening record, living trusts can be lengthy,
complicated documents with tiered beneficiaries. Our members report that
it is very difficult to get information from accountholders who may be
confused by the complexity and terminology of living trust documents.
Moreover, living trusts can be amended or revoked; beneficiaries can
be added or removed; contingencies can be fulfilled. However, account
owners do not routinely communicate any of these changes to depository
institutions. In most cases, it would not even occur to them to notify
their institutions.
Nor is it the responsibility of financial institutions to repeatedly
contact their customers to determine whether their account information
is up to date. To do so would place an unwarranted burden on financial
institutions, both from a monetary perspective and from a customer
relations perspective. In fact, customers might well perceive such
actions as an invasion of privacy.
Although we commend FDIC for seeking to provide expedited payouts to
depositors of failed institutions by relying on institutions’ account
records, MBA believes that FDIC should continue to do exactly what it
does today—have the account owner certify the existence of the living
trust along with beneficiary, interest, and kinship information at the
time the institution is closed. Only at that time can FDIC be certain
that their actions are based on the current status of the trust.
Furthermore, the beneficiaries of the revocable trust may know
relatively little about their trust benefit; almost certainly the same
beneficiaries would not be in a position to manipulate the trust
agreement to obtain additional deposit insurance at the time the FDIC
liquidates the bank.
As discussed above, MBA supports Alternative One with significant
modifications. We do not believe the requirements for certification and
beneficiary information in the account records are practicable or
reliable. Moreover, those requirements may, in some states, serve to
eliminate statutory protections provided to third parties dealing with
trustees. Finally, we believe FDIC should continue its current practice
of ascertaining the existence of a living trust, and beneficiary and
kinship information at the time an institution is closed.
Thank you for the opportunity to comment on the above notice of
inquiry. If I can be of additional assistance, please let me know.
Sincerely,
Max Cook
President
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