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Via email
August 28, 2003
Robert E. Feldman
Executive Secretary
Federal Deposit Insurance Corporation
550 17th Street N.W.
Washington, D.C. 20429
Attention: Comments/Legal ESS
Re: Deposit Insurance Coverage for Revocable Living Trust Accounts 68
Federal Register 38645, June 30, 2003
Dear Mr. Feldman:
The American Bankers Association (“ABA”) is responding to the
proposal by the Federal Deposit Insurance Corporation (“FDIC”) to
simplify the deposit insurance rules for living trust accounts to make
them more understandable to depositors and financial institutions.[1]
Our
members are keenly interested in this proposal, especially given the
recent popularity of living trusts as an estate administration tool. We
commend the agency for its ongoing attempts to make sure its deposit
insurance rules are understandable.
FDIC’s proposal is in response to existing confusion about the
coverage of living trust accounts, which has accounted for a
disproportionately large percentage of uninsured deposits in recent bank
failures as compared to other types of deposit accounts. The culprit 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. Rather, 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 such 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.
ABA supports 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, with the attendant depositor confusion. Finally, the
certification requirement in both alternatives poses significant legal
and practical problems.
Background
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.
ABA Position
As noted above, ABA 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. 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. By contrast, having to explain the change in
coverage to existing living trust account owners is sure to generate
significant confusion, if not downright hostility due to the perception
that their deposit insurance coverage is being reduced. Such confusion
would seem to be exactly the opposite of what FDIC is trying to achieve.
Recordkeeping Requirements. As discussed below, ABA 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. [2]
However, if depository institutions were to comply with the proposed
record-keeping requirements, it could be argued that they have imputed
knowledge of the trusts and thereby lose the protections afforded by
statute. For example, for many years attorneys practicing in Wisconsin
as well as the Wisconsin Bankers Association, have strongly discouraged
financial institutions that are not specifically in the trust business
from reading, reviewing or obtaining customers’ trust documents. 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, ABA 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.
ABA 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, ABA 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.
Conclusion
As discussed above, ABA 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.
If you have any questions, please don’t hesitate to contact me.
Sincerely,
Cristeena G. Naser
Senior Counsel
Regulatory and Trust Affairs
American Bankers Association
1120 Connecticut Avenue, NW
Washington, DC 20036
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[1]
The ABA brings together all categories of banking institutions to best
represent the interests of this rapidly changing industry. Its
membership—which includes community, regional and money center banks and holding companies,
as well as savings associations, trust companies and savings banks—makes ABA the largest banking
trade association in the country.
[2]
For example, Illinois, Michigan and Wisconsin each have such statutes. See, e.g.,760 Ill.
Comp. Stat. 5/8; Mich. Comp. Laws § 700.7404; Wis. Stat.§ 701.19(11).
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