FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Whether a Deposit Trust Agreement Created an Irrevocable Trust for Purposes of Section 330.10 of the FDIC's Insurance Regulations
March 9, 1994
Alan J. Kaplan, Assistant General Counsel
This is in response to your letter of December 22, 1993 concerning the deposit insurance coverage to be afforded to a certain fiduciary account maintained at [BANK].
First, we would like to confirm your understanding of two technical points raised in your letter. We agree that section 330.6(a) of the FDIC's regulations, 12 C.F.R. § 330.6(a), does provide "pass-through'' insurance coverage for funds held by an insured depository institution in any fiduciary capacity (e.g., as agent, custodian, nominee), other than as trustee of an irrevocable trust (which is governed by section 330.10 of our regulations, 12 C.F.R. § 330.10). We also agree that the requirements of section 330.11 of the FDIC's regulations, 12 C.F.R. § 330.11, only apply to irrevocable trusts where the trustee is not an insured depository institution.
The only remaining issue is whether or not the recently revised [DEPOSIT TRUST AGREEMENT] ("Revised Trust Agreement") creates an irrevocable trust for purposes of section 330.10(a) of the FDIC's deposit insurance regulations, 12 CFR § 330.10(a), such that each [COMPANY] customer's interest in the account established pursuant to the Revised Trust Agreement is insured separately from any other accounts that the customer may maintain in the same insured depository institution. You have provided us with a legal opinion by the law firm of *** ("Legal Opinion") opining that the Revised Trust Agreement creates an irrevocable trust under Connecticut law.
Section 311(b)(3) of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") amended section 7(i) of the Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1817(i), effective December 19, 1993, substantially reducing the extent of deposit insurance coverage available for accounts held by an insured depository institution in a fiduciary capacity. Under pre-existing FDIC rules, when an insured depository institution held funds as an agent, nominee, guardian, custodian, conservator, trustee or in any other fiduciary capacity, those funds were insured in the amount of up to $100,000 for the interest of each principal or beneficiary and that insurance was separate from the insurance provided for any other accounts maintained by the principals or beneficiaries at the same insured institution. The FDICIA amendment still provides insurance coverage for such accounts on a per beneficiary basis, but eliminated the separate insurance coverage that was provided for the beneficiary's interests. In other words, a principal's or beneficiary's interest in such an account will now be aggregated with other accounts maintained by that person at the same insured institution. However, section 7(i) of the FDI Act and § 330.10(a) of the FDIC's regulations still provide separate insurance coverage, in the amount of up to $100,000 per owner or beneficiary, whenever an insured institution is acting as trustee under an irrevocable trust established pursuant to a statute or written trust agreement. Neither the statute nor the FDIC's regulations define the term "irrevocable trust."
[COMPANY'S DEPOSIT] system allows licensed [COMPANY] meter users ("Mailers/Settlors") to have their POSTAGE METERS RESET electronically. In order to avail themselves of this service, Mailers/Settlors must enter into a ("Rental Agreement") with [COMPANY] and must advance funds for the payment of future postage. These funds are then collected through a lock-box arrangement and deposited with [BANK] as trustee, as mandated by the Revised Trust Agreement, which was attached as Exhibit A to the Legal Opinion and will be printed on page 2 of the Rental Agreement. [BANK] then invests the deposits, primarily in certificates of deposit or savings accounts at FDIC insured banks, pursuant to the terms of the Revised Trust Agreement. (Revised Trust Agreement, numbered paragraph 5).
Each Rental Agreement between [COMPANY] and a Mailer/Settlor is for an initial term of either one or three years or some number of months. During the initial term, the Mailer/Settlor may not terminate the Rental Agreement. (Rental Agreement, Terms and Conditions, numbered paragraph 6). After the initial term, the Mailer/Settlor may terminate the Rental Agreement upon 90 days written notice to [COMPANY]. (Rental Agreement, Terms and Conditions, numbered paragraph 6). The Mailer/Settlor, upon terminating the Rental Agreement, may send a written demand letter to [COMPANY] requesting a refund of any of its funds remaining in the trust account, thus terminating its interest in the trust. (Rental Agreement, Terms and Conditions, numbered paragraph 11).
The Revised Trust Agreement is between [COMPANY], as sponsor of the [DEPOSIT] system, and [BANK], as trustee. The Rental Agreement Mailers are referred to as the Settlors of the trust. The Revised Trust Agreement incorporates each Mailer/Settlor "as if the Mailer were an actual signatory of" the Revised Trust Agreement (Revised Trust Agreement, numbered paragraph 1) and seeks to bind each Mailer/Settlor to any alterations or amendments to the Revised Trust Agreement. (Id.) While the Revised Trust Agreement is signed only by [BANK] and [COMPANY] each Mailer/Settlor who signs a Rental Agreement agrees to be bound by all of the terms and conditions of the Revised Trust Agreement. (Rental Agreement, Acceptance of Trust Agreement).
Deposits held by [BANK] can be transferred from the trust only upon instructions from [COMPANY], for payment to the United States Postal Service for postage used by a Mailer/Settlor or to a Mailer/Settlor upon the termination of its Rental Agreement or for the return of excess deposits. (Revised Trust Agreement, numbered paragraph 2). Pursuant to the Rental Agreement, the Mailer/Settlor has the right to terminate the Rental Agreement upon 90 days written notice to [COMPANY] at any time after the initial term. (Rental Agreement, numbered paragraph 6). Upon termination of the Rental Agreement, the Mailer/Settlor may instruct [COMPANY] to terminate its interest in the trust account and refund any remaining funds. (Rental Agreement, Terms and Conditions, numbered paragraph 11).
During our meeting of November 23, 1993, we indicated to you that it would be helpful for the FDIC to have an opinion from local counsel concerning the irrevocability/revocability of the Revised Trust Agreement under Connecticut law. In the context of deposit insurance, the FDIC looks to state law in helping us to determine the ownership of deposits. See 12 CFR § 330.3(h). Nonetheless, the question of what is an irrevocable trust, as that term is used in § 7(i) of the FDI Act and § 330.10(a) of our regulations, is ultimately a question of federal law.
We concur with the Legal Opinion to the extent that it opines the trust to be irrevocable during the initial term and the ninety days thereafter before which the Mailer/Settlor's written notice to [COMPANY] would cause its interest in the trust to be terminated. However, once the Mailer/Settlor has the ability to cause the trust to be terminated as to its interests, we are of the opinion that the trust is not irrevocable for purposes of § 330.10(a) of the FDIC's regulations.
Our review of the Revised Trust Agreement, as compared to the pre-existing 1979 trust agreement, indicates that the two agreements are very similar. The primary difference appears to be that the Revised Trust Agreement explicitly states in two places that the trust created thereby is irrevocable. (Revised Trust Agreement, paragraph 1 & numbered paragraph 9). It also explicitly provides that it may not be terminated, revoked or modified by the Mailers. (Revised Trust Agreement, numbered paragraph 9). The pre-existing trust agreement contains no such language. The Revised Trust Agreement contains several other revisions which are not relevant to your inquiry concerning deposit insurance.
The Legal Opinion states that the Revised Trust Agreement's declaration that the trust is irrevocable is evidence that such is the case. We are not aware of, nor does the Legal Opinion cite, any precedent which stands for the proposition that such a self-serving statement is to be accorded any significant weight. The Legal Opinion cites Scott on Trusts, § 329A, (4th ed. 1991) in support of the proposition that a trust is irrevocable if the settlor cannot, by an express or implied power, revoke or modify the substance of the trust. The Legal Opinion goes on to state:
If the trust is evidenced by a written instrument, and there is no provision in the instrument expressly or impliedly reserving to the settlor a power to revoke the trust, the trust is irrevocable. The Trust created by the Agreement meets this standard. The terms of the Agreement do not reserve to the Mailer the ability to revoke the Trust. Indeed, the Agreement states the contrary.
(Legal Opinion, p. 4). (Citation omitted). While the Legal Opinion is correct that the Revised Trust Agreement explicitly states that the Mailer/Settlor cannot amend, revoke or terminate the trust, it fails to consider the fact that the Mailer/Settlor can instruct [COMPANY] to effectively terminate its interest in the trust on ninety days written notice after the expiration of the initial term of the Rental Agreement. (Rental Agreement, numbered paragraph 6). If the Mailer/Settlor instructs [COMPANY] to terminate its interest in the trust, the balance of funds in the Mailer/Settlor's trust account must be refunded within 45 days. (Rental Agreement, numbered paragraph 11). Thus, at the expiration of the initial term, the Mailer/Settlor possess the power to effectuate the termination of its interest in the trust. The use of the Rental Agreement as the vehicle for allowing the Mailer/Settlor to instruct [COMPANY] to terminate the trust appears merely to be a device which is being used to bolster the legal argument that the trust is irrevocable.
However, later on in the Legal Opinion (page 6), the firm cites Bogert, Trusts and Trustees, § 996 (2d ed. 1983) and Scott on Trusts, § 329A (4th ed. 1191), for the proposition that "a trust which cannot be revoked for a stated period of time is irrevocable until the expiration of the stated period." We agree. But, what the Legal Opinion does not say is that if a trust is irrevocable for only a stated period of time, then it would seem reasonable to conclude that it must be revocable subsequent to that stated period to the extent it still exists (has not already been revoked).
We have reviewed the cases cited in the Legal Opinion concerning irrevocable trusts, Connecticut Bank & Trust Co. v. Hurlbutt, 157 Conn. 318 (1968) and Bauer v. Bauer, 490 P.2d. 1350 (Wash. App. 1971). In Hurlbutt, the Supreme Court of Connecticut held that a settlor's letter to the trustee requesting an amendment to an irrevocable inter vivos trust was ineffective because the trust agreement provided that it could only be amended with regard to the time and manner in which income and/or principal shall be paid to the beneficiaries. The letter sought to change the beneficiaries. We agree with the Legal Opinion that this case "underscores the principle that a court will not allow a settlor to exercise powers over the trust property to the extent that the exercise of those powers is inconsistent with the express provisions of the agreement." (Legal Opinion, p. 4). However, we fail to see how this case supports the conclusion that the trust in this case is irrevocable after the expiration of the initial term of the Rental Agreement.
In Bauer, the Court of Appeals of the State of Washington held that a settlor who created an irrevocable trust pursuant to a divorce decree for the benefit of his children could not modify the trust so that the trust assets, which had unexpectedly increased in value, would be returned to him when his children reached the age of 25. Once again, while we agree that this case supports the proposition that a trust is irrevocable unless the settlor retains specific authority to modify or revoke it, we are of the opinion that it is not applicable to the instant case where the Mailer/Settlor can effectively terminate its interest in the trust after the expiration of the initial term of the Rental Agreement by so instructing [COMPANY] in writing.1
Based upon our conclusion that the trust is irrevocable up until the point in time at which the Mailer/Settlor can effectuate the revocation of their interest in it, it is our opinion that each Mailer/Settlor's interest in an account established pursuant to the Revised Trust Agreement would be insured separately from any other funds which the Mailer/Settlor may have on deposit at the same insured depository institution, up to a maximum of $100,000, for such period of time. However, once the Mailer/Settlor has the ability to revoke the trust by notifying [COMPANY] in writing, this separate deposit insurance would cease. Of course, if the Mailer/Settlor were to renew the Rental Agreement, and thus its interest in the trust, it would once again receive the benefit of the separate insurance until it is once again able to revoke the trust.
My opinion is based upon the facts as described above. Different facts may warrant a different conclusion. This letter represents the opinion of the Legal Division staff and, as such, is not binding on the FDIC or its Board of Directors. If you have any questions concerning this letter, please do not hesitate to contact me (202-898-3734), or Mr. Claude A. Rollin (202-898-3985) or Mr. Jeffrey M. Kopchik (202-898-3872) of my staff.
1We also point out that this case was decided by a state court in Washington, not Connecticut. Go back to Text