via e-mail
September 4, 2003
Robert E. Feldman
Executive Secretary
Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, DC 20429
Re: Deposit Insurance Regulations; Living Trust Accounts
Dear Mr. Feldman:
The Independent Community Bankers of America (ICBA)1
appreciates the opportunity to offer the following comments on the
FDIC’s proposed rules to amend its deposit insurance regulations
concerning living trust accounts. The purpose of the amendments is to
clarify and simplify the regulations on the insurance coverage of living
trust accounts.
ICBA agrees with the FDIC that despite efforts in 1998 and 1999 to
clarify the deposit insurance regulations, there is still significant
public and industry confusion about the insurance coverage of living
trust accounts. Bankers and customers assume that living trust accounts
are insured like payable-on-death (POD) accounts and are 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.
They are unaware that living trusts often fail to satisfy the
requirements for per-beneficiary coverage because of the existence of
defeating contingencies in the trust agreements. Recent depository
institution failures where 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 appear
to confirm the overall misunderstanding that bankers and bank customers
have about this issue.
The existing deposit insurance rules on living trusts also hinder the
FDIC’s ability to give advice on this issue since a legal analysis of
the trust agreement is necessary before the FDIC can give a definitive
answer on the amount of insurance coverage. In response to questions
about coverage of living trust accounts, the FDIC usually advises
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 an
attorney.
ICBA Urges the Adoption of Alternative One
To address this problem, the FDIC is proposing two alternatives. 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”). Under this alternative, 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.
Under the second alternative (“Alternative Two”), the FDIC would
create a separate category of coverage for living trust accounts that
would be insured up to $100,000 per owner of the account. Individual
customers would be insured up to a total of $100,000 for all living
trust accounts he or she has a 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
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 or POD accounts the owner may have at the same
depository institution.
ICBA believes that the FDIC should adopt Alternative One because it
would be the easiest to understand of the two alternatives and would not
decrease the overall level of deposit insurance coverage. As was stated
before, most depositors and bankers presently believe that living trusts
accounts are insured like POD accounts and are unaware of the problem of
defeating contingencies. Since, under Alternative One, coverage would no
longer depend on defeating contingencies in the trust agreement,
depositors would have a clear understanding of their account coverage.
Bankers will be able to explain to their customers that living trust
accounts are insured like POD accounts and that insurance is limited to
$100,000 per qualifying beneficiary. The FDIC would also be able to
clearly advise customers of the insurance coverage of living trusts
without having to perform a legal analysis of the trust document.
One rationale for covering POD accounts on a per beneficiary basis is
that such accounts are frequently used as an alternative to a will and
to pass title to assets outside of probate. Living trusts are frequently
used for the same purpose. Thus, similar per beneficiary coverage for
living trust accounts is appropriate.
Alternative Two, on the other hand, would change the existing rules
by creating a completely new category of coverage and would decrease the
deposit insurance coverage for revocable trusts with more than one
beneficiary. Because coverage under Alternative Two would differ from
POD account coverage, Alternative Two is likely to generate more
customer confusion than Alternative One.
Moreover, ICBA opposes Alternative Two because it will result in an
overall decrease in deposit insurance coverage. At a time when coverage
levels have seriously eroded due to inflation, it is inappropriate to
change deposit insurance rules in a way that further reduces available
coverage. Bank customers with living trusts are likely to view with
disfavor a change that reduces their deposit insurance coverage.
ICBA recently conducted an informal survey of its members to see
which alternative—Alternative One or Two—they would prefer. More than
ninety percent indicated that they preferred Alternative One because it
was the easiest to understand and was in the best interests of their
customers.
Additional Recordkeeping and Certification Requirements Should be
Avoided
Under both alternative proposals, the FDIC would require that, when a
depositor opens a living trust account, banks would have to “certify” in
their deposit account records the existence of the living trust. The
proposal is unclear as to what this certification process would entail
and whether the bank would ever be liable for its certification. The
FDIC indicates in its proposal that the bank would merely ask to see a
copy of the trust and then the bank would note in its deposit account
records that such a trust exists. However, would there be occasions when
the bank would have to review the entire trust instrument and perhaps
even consult with an attorney? Would the bank be liable if the bank
certifies to the existence of a living trust and for some reason the
trust was later found to be legally nonexistent?
In addition to certifying the existence of living trust accounts, the
FDIC is also proposing under Alternative One that banks obtain
affidavits from living trust owners as to whether each beneficiary is a
“qualifying beneficiary” (e.g. the trust owner’s spouse, child,
grandchild, parent or sibling) and that banks indicate in their records
at the time the account is opened (1) the ownership interests of living
trusts and (2) the kinship relationship between the trust account owner
and the trust beneficiaries. The FDIC believes that these additional
certification and recordkeeping requirements would expedite payments to
living trust depositors when a bank fails.
ICBA opposes any additional recordkeeping or certification
requirements for living trust accounts. While we appreciate the problems
and delays that the FDIC faces with living trust accounts, we do not see
how the FDIC can avoid the time-consuming process of reviewing living
trust agreements when a bank failure occurs. Requiring each institution
to “certify” to the existence of a living trust at the time the account
is opened is not going to confirm that the trust exists at the time the
institution fails. Living trusts are usually drafted so that they can be
easily amended or revoked by the grantor. Kinship relationships and
ownership interests may also change between the date the account is
opened and the date of an institution failure. In short, the only
reliable way that the FDIC can get current information on the existence
of a living trust and its beneficiaries is to contact the owner at the
time the institution fails and obtain from the trust owner the necessary
certifications and trust documentation.
Furthermore, it would be very difficult for a community bank to
acquire and maintain such information. Besides the significant
recordkeeping burden, for privacy reasons, some living trust owners may
be reluctant to divulge information about their trusts or certify to the
existence of a trust. Instead of divulging information about their
trusts, living trust owners may conclude that the best way to insure
their privacy would be to open a living trust account with a financial
institution other than a bank such as a broker or an insurance company.
Rather than imposing additional recordkeeping and certification
requirements on banks, ICBA suggests that the banks be required to
acquire and maintain only the names of the account owners of living
trusts. In the unlikely case the bank fails, then the FDIC would then be
in position to contact the account owner and verify the existence of the
trust and the ownership interests and kinships of the beneficiaries. If
necessary, the FDIC could then obtain certifications from the account
owner of the existence of the trust and whether the beneficiaries were
“qualified” and could examine the trust documentation.
ICBA also suggests that the FDIC consider eliminating the requirement
that a beneficiary of a living trust be a “qualified beneficiary” in
order to be insured. This would avoid having the FDIC review trust
documentation to confirm the kinship relationships of all of the
beneficiaries. Although this may increase overall deposit insurance
coverage, the increase most likely would be insignificant.
Conclusion
ICBA urges the FDIC to adopt Alternative One as the best way to
simplify and clarify the insurance rules for living trust accounts. We
also urge that the FDIC not impose any additional recordkeeping or
certification requirements on depository institutions for living trust
accounts. If you have any questions or need any additional information,
please contact Chris Cole, ICBA’s regulatory counsel at 202-659-8111.
______________________________________
About ICBA: ICBA is the
nation's leading voice for community banks and the only national trade
association dedicated exclusively to protecting the interests of the
community banking industry. We aggregate the power of our members to
provide a voice for community banking interests in Washington, resources
to enhance community bank education and marketability, and profitability
options to help community banks compete in an ever-changing marketplace.
ICBA has nearly 5,000 members with 17,000 locations nationwide. Our
members hold more than $526 billion in insured deposits, $643 billion in
assets and more than $405 billion in loans to consumers, small
businesses and farms. For more information, visit
www.icba.org.
Sincerely,
C.R. Cloutier
Chairman
Independent Community Bankers of America
Washington, DC
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