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4000 - Advisory Opinions


Insurance Coverage of Funds Over Which Bank Trust Division Acts as Fiduciary

FDIC-85-26

November 6, 1985

Roger A. Hood, Assistant General Counsel

Your letter of July 5, 1985 requests certain information regarding deposit insurance coverage of funds over which the trust division of the bank acts as fiduciary. The following response is a reply to your questions:

(1) "Trust funds" held by an insured bank are insured pursuant to 12 U.S.C. § 1817(i). The term "trust funds'' is defined by 12 U.S.C. § 1813(p) to include funds held by an insured bank as trustee, executor, administrator, guardian or agent. These sections, read together, provide insurance coverage with respect to funds held by a bank in its capacity as an agent, separate and apart from funds deposited directly by the principal. This statutory coverage controls over the provisions of our regulations relating to the insurance of funds deposited by an agent (other than an insured bank) on behalf of his or her principal (12 C.F.R. § 330.2(b)) which provides for the aggregation of funds deposited by a principal with funds deposited on behalf of that principal by his or her agent. The same would hold true with respect to funds deposited as guardian, etc. under the provisions of 12 C.F.R. § 330.2(c).

Similarly, funds held by a bank, as trustee, under a revocable trust would be "trust funds" within the purview of the FDI Act, and insured separately, pursuant to 12 U.S.C. § 1817(i), from funds deposited by either the settlor or beneficiary and without regard of the kinship of the parties. On the other hand, funds deposited in a revocable trust account by an individual, as described in § 330.3, are insured separately from other funds of the owner only if the beneficiary of the trust is the spouse, child or grandchild of the owner.

Funds held by a bank as executor or administrator are "trust funds" and, accordingly, insured separately from other funds of the bank, but 12 C.F.R. § 330.4 has applicability here, because it provides that such funds shall be insured in the aggregate to $100,000. The result is that funds of a decedent held by any executor or administrator, whether an insured bank or not, are insured to the maximum amount of $100,000.

Section 330.8 relates to funds of public units deposited by the official custodian thereof. The term "official custodian" is intended to refer to county or municipal treasurers, tax collectors, clerks of court and similar public officials charged with the responsibility of receiving, holding, expending and accounting for public monies. This regulation is directed toward a relationship quite different from that of a bank acting in a fiduciary capacity. To the extent that a bank may hold "trust funds" for the benefit of a public unit, those funds would be insured under the principles of section 330.8 which tracks the language of section 11(a)(2) of the FDI Act (12 U.S.C. § 1821(a)(2)). The exception in section 7(i) was added in 1974 when the basic coverage for deposits was raised to $40,000, and time and savings deposits of public units were granted separate coverage of $100,000. Thus, the then-existing limits for deposits of public units ($40,000 for demand deposits and $100,000 for time and savings deposits) were applicable whether the funds were held by an insured bank as "trust funds" or deposited by the treasurer or other official custodian. (The $40,000 limit for demand deposits has been raised to $100,000.)

Section 330.10 relates to the insurance of "trust interests" in deposit accounts. The term "trust interest" is defined in section 330.1(c)(4) to be an interest in an irrevocable express trust and excludes any interest retained by the settlor. Section 330.1(c)(5) provides that with respect to trust funds held by an insured bank, "trust interest" will have the same meaning as trust funds in section 3(p) of the FDI Act. The section 3(p) definition has no requirement of irrevocability and no exemption for retained interests. To the contrary, section 3(p) includes funds held by an insured bank as agent, a relationship which would commonly be revocable and would reflect a retained interest by the settlor (or more properly, the principal). To this extent, section 330.10 is applicable to trust interests deposited by an insured bank, but the term is defined differently depending on whether the fiduciary is an insured bank or not. This rationale lends support for the longstanding interpretation that the coverage of section 7(i) which is applicable to each "trust estate" is applied separately to the beneficial interests of an estate. In other words, section 330.10, with respect to funds held or deposited by a bank as a fiduciary, could be read:

"All [trust funds] for the same beneficiary . . . shall be added together and insured up to $100,000 in the aggregate . . . ."

(2) See the discussion in (1) above, relating to § 330.10.

(3) Assuming that the necessary records pursuant to section 330.1 have been kept and that the nature of the account is revealed on the books of the bank, the interest of each beneficiary in the irrevocable trust should be insured up to $100,000. Thus, the total insurance coverage would be $300,000.

(4) The answer to this question depends on the party for whom the bank is holding the funds in its capacity as trustee. If the funds are held as a sinking fund to pay bondholders, each bondholder's interest would be recognized for insurance purposes (12 C.F.R. § 332.8(b)). If, on the other hand, the funds represent the proceeds of the bond sale to be held and disbursed to the issuer (or to contractors or others to carry out the purpose for which the bonds were issued), the funds would be held for the benefit of the issuer.

(5)(a) Trust funds would be insured separately from non-trust funds held by the same customer in a single bank.

(b) The beneficiary of an irrevocable trust account, assuming all recordkeeping and other similar criteria are adhered to, would be insured up to $100,000 separately from deposits held in the bank's commercial division.

(c) If an individual bondholder was in fact insured up to $100,000 from bond proceeds held by the bank's trust division, (see (4), above), his entitlement to additional deposit insurance coverage for deposits held in the commercial bank's division would not be affected by the holding of those trust funds.

(d) The fact that a beneficiary of a pension or profit-sharing plan is insured up to $100,000 does not affect that beneficiary's entitlement to additional deposit insurance coverage in the commercial division.

(e) The interests of a beneficiary in two trusts created by the same settlor and held by the same bank, as trustee, would be aggregated for purposes of determining maximum insurance coverage. Trusts created by separate settlors for the same beneficiary would not be so aggregated.

(f) The interests of a beneficiary of a pension account and a profit-sharing account created by the same employer (settlor) and held by the same bank, as trustee, would be aggregated for insurance purposes.

(g) Separate insurance coverage would be afforded for the named deposits, in each case, so long as the settlor is not the same for the two named accounts.

(h) An irrevocable trust account and a nondiscretionary agency account would each come within the definition of "trust funds" in section 3(p) of the Federal Deposit Insurance Act (12 U.S.C. § 1813(p)). Accordingly, if created by the same settlor for the benefit of the same beneficiary, the interests would be aggregated for insurance purposes.

(i) Assuming that the beneficiary of the bond account is in fact the owner of the funds and entitled to insurance coverage for that account, separate insurance coverage for an irrevocable trust account and a bond account should pertain.

(j) See individual responses.

(6) Section 330.8 is not applicable to the above described fact situation.


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