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August 27, 2003
Mr. Robert E. Feldman,
Executive Secretary
Attention; Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17h Street, NW.
Washington, DC
Re: Proposed Deposit Insurance Regulations; Living Trust Accounts
Dear Mr. Feldman:
The Wisconsin Bankers Association (WBA) is the largest financial
institution trade association in Wisconsin. WBA represents nearly 320
state and nationally chartered banks, savings banks and savings and loan
associations located in communities throughout the state. In addition,
WBA has a wholly owned subsidiary, FIPCO, which licenses documentation
software and sells hard-copy forms to financial institutions in
Wisconsin and other states. WBA appreciates this opportunity to comment
on the proposed regulations regarding FDIC insurance coverage of
revocable living trust accounts.
WBA understands there has been some confusion on the part of
depositors and financial institution employees regarding the FDIC
insurance coverage afforded payable on death accounts, including
revocable living trusts. In an effort to avoid confusion on these and
other FDIC insurance coverage regulations, WBA regularly conducts
educational programs focusing on these issues.
WBA appreciates the concerns raised by FDIC regarding the confusion
surrounding this category of insurance coverage. Unfortunately, neither
proposed alternative effectively creates a simpler, less confusing
system while still meeting the coverage expectations of depositors.
However, WBA believes "Alternative One," subject to certain
modifications, can achieve this goal. Therefore, WBA supports certain
aspects of "Alternative one" and submits the following comments and
suggestions to the FDIC today.
WBA Supports Proposed "Alternative One" With Modifications
WBA supports the FDICs proposed Alternative One, subject to the
modifications discussed below, as it is the most effective means to
reduce confusion about revocable trust accounts insurance coverage
without reducing the expected level of coverage currently provided to
such accounts.
Under current 12 CFR 330.10(f), if a revocable living trust includes a
"defeating contingency" relative to a beneficiary's interest in the
trust assets, insurance coverage will not be provided for that
beneficiary's interest pursuant to the payable on death insurance
coverage category. The FDIC cites the "defeating contingency" provision
as the primary cause of confusion which, in some instances, results in
the delay in payment of insurance to revocable living trust depositors.
While employees of institutions in Wisconsin discuss with revocable
living trust depositors the defeating contingency concept regarding
insurance coverage as outlined in the FDIC's brochures (which are given
to depositors at account opening), WBA understands and shares the FDIC's
desire to make insurance coverage determinations as quickly and simply
as possible. Therefore, WBA fully supports elimination of the "defeating
contingency" as is proposed in Alternative One. However, WBA
unequivocally and vehemently opposes in either proposed alternative, any
requirement for financial institutions to: (1) obtain any part of a
trust document; (2) provide a certification of trust existence; and
(3) specifically identify a qualifying beneficiary's interest in trust
assets or relationship to the grantor(s).
As is true in many other states, Wisconsin has a well-established
statute that protects third persons from liability in dealing with
trustees of trusts. Sec. 701.19(11), Ws. Stats., states:
Protection of third parties. With respect to a third person dealing
with a trustee or assisting a trustee in the conduct of a transaction,
the existence of trust power and its proper exercise by the trustee
may be assumed without inquiry The third person is not bound to inquire
whether the trustee has power to act or is properly exercising the
power, and a third person, without actual knowledge that the trustee is
exceeding the trustee's powers or improperly exercising them, is fully
protected in dealing with the trustee as if the trustee possessed and
properly exercised the powers the trustee purports to exercise. A third
person is not bound to assure the proper application of trust property
paid or delivered to the trustee.
In essence, this statute allows third parties, such as financial
institutions, to rely on the trustee's statements, representations, and
actions, as being proper without consequence of liability so long as the
third party does not have actual knowledge to the contrary. As a result,
most financial institutions in Wisconsin do not obtain, review or retain
any part of a trust document to avoid having actual knowledge, thereby
eliminating the possibility of liability to beneficiaries to act in
accordance with terns of the trust. In light of this statute, WBA strongly objects to any requirement that would in any fashion jeopardize the
protections given under sec. 701.19(11), Wis. Stats. WBA is certain that
these protections would be jeopardized if the three requirements
specifically identified above were included in the final regulation.
However, WBA does not take issue with obtaining certain
administrative information from trustees regarding living trusts at
account opening. In fact, WBA's wholly owned subsidiary, FIPCO, produces
a copyrighted form, WBA 84 "Declaration of Trustee Designating
Depository," for this very purpose. The document is signed by the
trustee upon the trustee providing relevant information regarding the
trust without causing the financial institution to have actual knowledge
regarding specific provisions of the trust or the trustee's authority.
This is a declaration by the trustee, not a certification by the
financial institution, regarding the trust's existence.
WBA finds it absolutely inappropriate for a financial institution
that is not the trustee of a trust to certify the existence of the
trust. Such a requirement essentially imposes a duty on the institution
to render a legal opinion of trust existence, which is not a practice of
most financial institutions. In addition, such a requirement flies in
the face of the long-standing protections afforded by sec. 701.19(11),
Stats.
WBA also vehemently objects to any requirement for a deposit account
record to specifically identify any beneficiary's "ownership" interest
in trust assets or to specifically identify the beneficiary's
relationship to the grantor. Notwithstanding the problems WBA has with
this provision in the context of sec. 701.19(11), Wis. Stats., this
particular requirement would also be difficult to fulfill due to the
very nature of revocable living trusts. These trusts can be and are
amended or revoked by grantors at anytime; however, grantors do not
typically make it a point to notify depository institutions of such
changes. Therefore, a deposit account record containing a specific
breakdown of a beneficiary's interests as of a particular date may not
be applicable on another date due to subsequent amendment or revocation.
While WBA understands that FDIC's motivation to change these
regulations is due, in part, to its desire to expedite the payment of
insurance proceeds, WBA believes it is simply not enough for FDIC to
rely on information contained in deposit account records at an
institution to determine how insurance proceeds are to be applied.
Without further investigation, the proceeds may be applied incorrectly.
Therefore, WBA believes the FDIC has a responsibility to its insured
depositors to take the steps and time necessary to assure the proper
application of insurance proceeds. This means going beyond deposit
account records and, among other things, reviewing trust documents when
circumstances warrant added investigation.
WBA also finds it unnecessary to identify the beneficiary's
relationship to the depositor. There is no benefit to FDIC where a
qualifying beneficiary is identified as "John Q. Public (brother of
grantor)" versus "John Q. Public." WBA believes it is FDIC's current
practice to verify whether a named beneficiary is one who qualifies for
pass-through insurance coverage in its determination of proper
application of insurance proceeds.
Thus, the FDIC should continue to do exactly what is does today - have
the account owner certify the existence of the living trust and verify
the beneficiary's eligibility for pass-through insurance purposes at the
time the institution is closed. Only at that time can the FDIC be
certain that the payment of insurance proceeds is based upon the current
status of the trust.
For the reasons stated above, WBA supports Alternative One to the
extent it eliminates "defeating contingencies" from the regulations
governing revocable living trust account insurance coverage, subject to
the modifications described.
WBA Strongly Objects to the Adoption of Proposed "Alternative Two"
Simply stated, the FDIC admits its proposed "Alternative Two" would
reduce insurance coverage given to revocable living trust accounts. In
many cases, revocable living trust depositors have chosen this trust
structure specifically for the purpose of obtaining the benefits of
pass-through insurance in order to protect trust assets. In essence,
these depositors have relied upon the well-established regulations set
forth by the FDIC. It is absolutely unacceptable for the rules to be
changed by FDIC in the middle of the game when the result is adverse to
the depositor. If "Alternative Two" were adopted these depositors would
be left scrambling to close accounts at one institution and reestablish
accounts at other institutions, including non-traditional financial
service providers that are not regulated or insured by FDIC. WBA does not
view such backlash as favorable under any circumstances and doubts the
FDIC would either.
WBA also rejects proposed "Alternative Two" because of the
certification requirement it would impose on financial institutions as
explained in the discussion of WBA's position on Alternative One.
Conclusion,
WBA applauds the attempts that FDIC has made to address
misunderstandings about revocable living trust deposit account insurance
coverage. WBA believes that Alternative One, subject to the
modifications described earlier, is the preferable solution to relieve
confusion and retain the current level of deposit account coverage
realistically expected by revocable living trust depositors.
WBA appreciates the opportunity to comment on this important matter,
and trusts the FDIC will seriously consider the recommendations we make
today.
Sincerely,
Harry J. Argue, CAE
Executive Vice President/CEO
Wisconsin Bankers Association
Madison, WI
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