4000 - Advisory Opinions
Insurance Coverage Afforded a Revocable Trust Owned by Husband and Wife Where Funds Pass to Charities Upon Death of Last Settlor
FDIC-91-68 August 2, 1991 Adrienne George, Attorney
I am writing in response to your letter to the FDIC's Office of Consumer Affairs, which was forwarded to me in the Legal Division. I regret that it has taken me so long to respond to your questions, but we have been receiving so many letters that we have not been able to answer them as quickly as we would like.
In your letter, you write that two of your customers, a married couple named ***, have one account at your bank entitled the "*** Trust Estate." This trust account consists of jointly-owned assets. According to a telephone conversation you had with Seth Berenzweig, one of our other attorneys, the trust involved is a revocable trust during the lives of the two settlors; then, after the death of the first settlor to die, the trust becomes irrevocable. While the husband and wife are alive, they are entitled to the income of the trust, but they need not take it. (Presumably, although you do not say so in your letter, upon the death of the first settlor to die, the survivor can continue to take only the trust income, if he or she so desires.) Upon the death of the survivor, the remaining trust assets are distributed among several charities.
You then ask how these trust assets would be insured should your bank go into default. What matters here is whether the trust is revocable or irrevocable when the bank fails.
Let us suppose that the bank fails when both settlors are still alive. At this time, the trust is revocable, so the FDIC would follow the rules set forth in the enclosed introductory letter on revocable trust accounts, and in the enclosed "FDIC Legal Staff's Interpretive Guidelines on the Insurance of Revocable Trust Accounts." According to section 330.8(c) of our present insurance regulations (a copy of which is also enclosed), when a revocable trust account is in the form of Husband and Wife in Trust for Husband and Wife (or in trust for either one of them)--that is, where no beneficiaries other than the husband and wife are involved--the FDIC treats the account for insurance purposes as if it were a joint account. However, this rule does not apply in this case, because the *** Trust specifies that certain charities are to serve as beneficiaries of the trust after the death of the last settlor. For this reason, the rule that would apply would be section 330.8(b), dealing with nonqualifying beneficiaries.
According to this rule, when there are beneficiaries who are not the spouse, child or grandchild of the settlors but who will have a vested interest in the trust upon the death of the last settlor, these beneficiaries' combined interest in the trust (here, all of the trust funds) will be divided in half, with half of the funds insured as if they were the individually-owned funds of one settlor (the husband in our case) and the other half insured as if they were the individually-owned funds of the other settlor (the wife in our case). For example, let us assume that both settlors are alive when the bank goes into default, the trust contains $200,000, and the husband and wife each have an individually-owned account at the same bank, in the amount of $100,000. Following the rule, the $200,000 in the trust would be divided in half, with half of the funds ($100,000) insured as if they were the individually-owned funds of the husband. However, the husband already holds $100,000 in his own name at the same bank, so this amount would be added to the $100,000 share attributable to him from the trust, and this $200,000 total amount would be insured for only $100,000. The half of the trust funds attributable to the wife would be treated in the same way. Because this $100,000 would be considered the wife's individually-owned funds for insurance purposes, this $100,000 would be added to the $100,000 which she holds in her own name in the same bank, and that entire amount insured for only $100,000.
The picture changes, however, if the bank goes into default after the death of the first settlor but while the surviving settlor is still alive. In this case, because one of the settlors has died, the trust is now irrevocable (according to your description of the trust's terms), and the irrevocable trust rules apply. For these rules, please refer to section 330.11 of the enclosed insurance regulations. According to the trust, the settlors (and presumably the survivor of them) have a life estate in the trust income, and the charities are non-contingent remaindermen. Using the Internal Revenue Service tax tables referred to in section 330.11, one can calculate the value of the surviving settlor's life estate at the time the bank goes into default, and one can also calculate the interest of each of the remaindermen charities. Then, according to section 330.11, the surviving settlor's life estate would be insured for up to $100,000, and each charity's remainder interest would also be insured for up to $100,000.
Finally, if the bank went into default after the death of the surviving settlor but before the assets had been distributed to the charities, the irrevocable trust rules would again apply, and the interest of each charity in the trust would be insured for up to $100,000.