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4000 - Advisory Opinions

Deposit insurance coverage available for a living trust account held in connection with a joint living trust.


December 9, 2004

Joseph A. DiNuzzo, Counsel

This addresses the summary of deposit insurance coverage provided in your letter (copy enclosed). The summary reflects the telephone conversations you and I have had on the deposit insurance coverage that would be available, per FDIC-insured institution, for a living trust account held in connection with the joint living trust you have with your wife.

Based on the materials you have provided, the joint trust will divide into three trusts after the death of the first spouse: the survivor's trust, the marital trust and the bypass trust. The survivor's trust will consist of the surviving spouse's separate property and the surviving spouse's interest in the settlors' community estate. Upon the surviving spouse's death, the remaining funds in the survivor's trust will pass under the surviving spouse's will. The marital trust will consist of an amount equal to the federal estate tax marital deduction. This trust will provide for a life estate interest in the surviving spouse and a power to invade the trust principal for the surviving spouse's benefit. The bypass trust will be funded with the remaining funds of the estate. The surviving spouse and the settlors' child are the beneficiaries of the bypass trust. The beneficiaries each will have life estate interest in the bypass trust during the life of the surviving spouse. On the surviving spouse's death, funds in the bypass trust will be used as follows: $15,000 will be paid to each of the settlors' two grandchildren; $10,000 to the settlors' friend named in the bypass trust; and the remainder will be paid to the settlors' son.

When Both Spouses Are Alive

When both settlors are alive the maximum coverage on the living trust account would be $240,000. That's because, under the FDIC's revised living trust rules, we determine coverage based on the qualifying beneficiaries who receive the trust assets upon the death of the last settlor.1 Here that information is in the bypass trust, providing that the settlors' son, two grandchildren and friend will receive the assets when both settlors have died. Coverage is provided up to $100,000 per settlor, per qualifying beneficiary. Thus, coverage provided as to the settlors' son would be up to $200,000. Because the grandchildren's interests in the trust are limited to $15,000 each, coverage would be provided up to $30,000, assuming there are two living grandchildren. The friend is not a qualifying beneficiary, so when both settlors are alive, no additional revocable trust account coverage would be provided based on the presence of that beneficiary in the trust; however, the insurance rules provide that funds attributable to non-qualifying beneficiaries are insured as the settlor's single-ownership funds. 12 CFR 330.10(c). Coverage provided in connection with the friend's interest in the trust, therefore, would be up to $10,000, as the single-ownership account coverage afforded to the settlors (assuming the settlors have no other single-ownership funds at the same bank).

When One Spouse Dies

When the first spouse dies, coverage likely would change, depending on the amount in each of the three trusts created (and funded) upon the first spouse's death. Please note that the following information centers on the maximum deposit insurance coverage potentially available for the funds in each of the three trusts. The actual coverage would depend on the funds actually placed in (or attributable to) each respective trust upon the first spouse's death.

The funds in the survivor's trust would be insured as the survivor's single-ownership funds. That's because the survivor's trust is a revocable trust that names no qualifying beneficiaries. As noted, under the FDIC's regulations, funds of a revocable trust naming no qualifying beneficiaries are considered the single-ownership funds of the sector. Assuming the surviving spouse has no other single-ownership funds at the same bank, the funds in the survivor's trust would be insured to a maximum of $100,000. The funds in the marital trust (an irrevocable trust) would be insured based on each settlor's contribution to the marital trust. The funds contributed by the deceased spouse would be insured up to $100,000 relative to the present value of the life interest in the trust created for the surviving spouse. (The value of that life estate interest would be based on the life expectancy tables in the Internal Revenue Code.) Also as to the deceased spouse's contribution to the trust, the interest of the other beneficiaries of the marital trust would be insured to a combined limit of $100,000. The interests of these beneficiaries would be insured to a maximum of $100,000 because the surviving spouse has a power to invade the marital trust's assets for his or her benefit; thus, the beneficiaries' interests are contingent and, under the FDIC's regulations, contingent interest of an irrevocable trust are combined and insured to a limit of $100,000. 12 CFR 330.13(b).

As to the surviving spouse's contribution to the marital trust, the amount attributable to the surviving spouse's life estate interest in the trust would be considered a "retained interest" in the trust and thus insured, not as irrevocable trust funds, but as the settlor's single-ownership account funds, to a limit of $100,000 (combined with any other single-ownership funds the settlor might hold at the same insured bank). The remaining funds contributed by the surviving settlor would be insured to a maximum of $100,000 because of the contingent nature of the other trust beneficiaries' interests, as explained above.

Funds, if any, in the bypass trust would be insured separately from the funds in the survivor's and marital trusts. The insurance determination would be similar to that used for the marital trust: coverage would be based on each settlor's contribution to the trust. Because during the surviving spouse's lifetime the spouse and the settlors' son will each have a life estate interest in the bypass trust, the overall coverage for the funds in the bypass trust, upon the death of the first settlor, could be up to $400,000 (combining the value of the beneficiaries' life estate interests and the surviving spouse's retained interest in the trust). But the actual amount likely would be much less depending upon, first, the amount in the bypass trust and, second, the value of the beneficiaries' life estate interests.

In summary, the total maximum coverage for the three trusts upon the death of the first settlor could be substantially higher than the coverage available when both settlors are alive, but the actual available coverage at the time might be much less than the amount potentially available, depending on both the actual amount in each of the trusts and on the present value of the beneficiaries' life estate interests in the trust assets. Thus, upon the death of the first spouse, it would be advisable for the surviving spouse (or the trustee of the living trust) to consider afresh the deposit insurance coverage available on the deposit account(s) held in connection with the living trust. In this connection, please note that the FDIC's regulations provide a six-month grace period upon the death of a depositor. So, for example, if a settlor of a revocable trust dies, the coverage available on that account would remain the same (as if the settlor had not died) up until six months after the settlor's death, assuming that the funds are not withdrawn from the account and the account is not restructured prior to the end of the six months. 12 CFR 330.3(j).

When Both Spouses Have Died

Upon the death of the second settlor, coverage would be limited to the funds in the (irrevocable) bypass trust, the only remaining trust. The grandchildren's entitlement to $15,000 each would be fully insured and the settlors' friend's entitlement to $10,000 would be fully insured. The settlors' son's remainder interest would be insured to a maximum of $200,000 ($100,000 per settlor per non-contingent interest of each beneficiary). The total maximum coverage at that point, therefore, would be $240,000.


In response to your final question, please note that the available deposit insurance coverage on your accounts does not depend on who the trustee of the trusts is, as long as the person or entity is a permissible trustee under the applicable state law. Changing the trustee, for example, from an insurance company to one of the beneficiaries would not affect the account coverage, as long as it is lawful for a beneficiary to serve as the trustee of the trust. You can check on this state law issue with the Attorney General of the State of California.

I hope this information is helpful. Feel free to contact me at 202-898-7349 with any additional questions.

112 C.F.R. 330.10(f), as revised at 69 Fed. Reg. 2825, 2829 (Jan. 21, 2004). Go back to Text

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