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4000 - Advisory Opinions

Insurance Coverage of Identical Husband and Wife Revocable Trusts Containing a Defeating Contingency


October 15, 1990

Adrienne George, Attorney

This letter is in response to your July 11, 1990 letter to Gail Padgett and will confirm our telephone conversation of September 18, 1990.

In your letter, you describe two revocable trusts. Your wife is the settlor of one trust, and you are the settlor of the other. The accounts for both trusts are held by the same bank, and you ask how these accounts would be insured if the balance in each account was $55,000.

The short answer to this question is that, because you have no individually-owned accounts in the same bank with these two trust accounts, and because each trust has a different settlor, your trust (the trust of which you are settlor) would be insured for up to $100,000 and you wife's trust would be insured for up to $100,000. For this reason, each $55,000 trust account would be fully insured, for a total of $110,000 of insurance.

In order to see how I arrived at this result, we must look to the exact terms of the trusts. It is my understanding from our phone conversation that the *** Revocable Living Trust is simply the mirror image of the *** Trust, so I will deal only with the *** Trust.

As you described that trust to me over the phone, after your death, your wife will receive the income of the trust for her life, and she can receive principal from the trust at the discretion of the trustees for certain named purposes (e.g., to maintain her standard of living and for health reasons). Upon her death, the trust funds will be distributed outright to your two sons.

In order to understand how your trust's funds would be insured, you must first know a bit about the FDIC's insurance rules in general. Under the FDIC's rules, deposits in a bank or savings and loan association are insured according to the "right" or "capacity" in which they are held. The terms "right" and "capacity" refer to the manner in which the accounts are held, such as jointly-owned accounts, trust accounts or individually-owned accounts. All accounts (including savings or checking accounts and certificates of deposit) owned by a depositor in the same right and capacity within the same insured institution will be added together and insured up to $100,000. Deposits maintained in different rights and capacities are separately insured up to $100,000.

However, the rule which applies to trust accounts says that sometimes, if the beneficiary of a revocable trust is the spouse, child or grandchild of the trust settlor, that may entitle the settlor to even more insurance coverage than he would otherwise get--up to $100,000 times the number of trust settlors living when the insured depository institution goes into default times the number of qualifying beneficiaries (spouse, child or grandchild) who have a vested interest in the trust upon the death of the last settlor to die. (Of course, if the depository institution goes into default before the death of the last settlor to die, the only qualifying beneficiaries who might have a vested interest are those who are alive at the time of the institution's default.)

In determining the insurance coverage of revocable trusts, the important moment to look at in the life of the trust is the death of the last settlor, and the important question to ask is, at the death of the last settlor, which if any of the beneficiaries have a vested interest in the trust. The definition of a "vested interest" for a revocable trust is a highly complicated one, but I need not go into the whole definition in order to analyze your trust. All I need to ask is, upon your death, who is a qualifying beneficiary who has an immediate interest in your trust (your wife is), and does your wife have a vested interest in the trust so as to trigger the special insurance coverage described in the paragraph above (as we shall see, she does not).

In order for your wife's interest to receive such special insurance coverage, her interest, among other requirements, must be one in which the beneficiary either receives an outright distribution of her share of the trust principal upon the death of the last settlor (your wife does not receive such an interest upon your death) OR where the beneficiary can invade the principal of her share to an unlimited extent at her sole demand upon the settlor's death (your wife cannot do this because she must depend upon the other trustees' discretion to coincide with her wishes) OR where the beneficiary will eventually take her share outright, provided that she survives for a given number of years or to a certain age (your wife cannot meet this requirement either because the funds are held in trust until she dies, at which time they are distributed outright to your sons).

Because your trust cannot meet any of the three requirements listed above, the trust's funds will be insured as if they were the individually-owned funds of the settlor (***); that is, these funds will be added to any other funds which you hold in your name in the same depository institution and the entire amount will be insured for up to $100,000.

Because your wife's trust is simply the mirror image of yours, her trust also fails to meet any one of the three requirements listed above. For this reason, her trust's funds will be added to any funds which she holds in her own name in the same depository institution, and that entire amount will be insured for up to $100,000.

Where the funds in your trust come to $55,000, and you hold no individually-owned funds in the same institution, your trust's funds will be fully insured for $55,000. Where the funds in your wife's trust come to $55,000, and she holds no individually-owned funds in the same institution, her trust's funds will also be fully insured for $55,000.

I hope that this information will be useful to you. If I can be of any further help, I can be reached at (202) 898-3859.

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