FDIC Law, Regulations, Related Acts
4000 - Advisory Opinions
Deposit Insurance Coverage of a Revocable Trust
December 7, 1995
Adrienne George, Attorney
I am writing in response to your letter concerning the insurance coverage available to the account of a certain revocable trust. This letter will confirm our November 16, 1995 telephone conversation on the same subject.
In your letter, you write that two of your customers, a husband and wife, have established a revocable trust. If the wife predeceases the husband, 70% of the trust funds pass outright to the wife's nieces, nephews and a friend. The remaining 30% is further held in trust for the husband's use during his lifetime, and upon his death, these trust funds pass outright to his children.
If the husband predeceases the wife, 30% of the trust passes to his children outright. The remaining 70% is divided into two halves; half goes into an irrevocable trust and the other half into a revocable trust for the benefit of the wife during her lifetime. Upon the wife's death, the revocable trust is combined with the irrevocable trust, then distributed outright to the wife's nieces, nephews and friend. All of the beneficiaries are mentioned by name in the trust document.
You ask how an account containing the funds of such a trust would be insured. The answer would depend upon the state of the trust when the bank fails. For example, the bank might fail when both settlors are alive, when only one settlor is alive, or when both settlors have died (but the trust funds have not yet been completely distributed to the beneficiaries). Let's discuss each of these scenarios in turn, assuming in each case that all beneficiaries are alive when the bank fails.
1. The bank fails when both settlors are alive. If the bank fails when both settlors are alive, the trust is revocable, so we would apply the revocable trust rules. The revocable trust rules are explained in the "FDIC Legal Staff's Interpretive Guidelines on the Insurance of Revocable Trust Accounts (including Living Trust Accounts)" (also known as the "Guidelines"), which I have enclosed (along with their introductory letter). These rules tell us to look for qualifying beneficiaries (beneficiaries who are the spouse, child or grandchild of the settlor) who have a vested interest in the trust upon the death of the last settlor.
We can't tell exactly who these beneficiaries might be in the case of this trust, however, because they will be different people depending upon whether the husband or wife dies second. Thus, no beneficiary may be said to have a vested interest in the trust upon the death of the last settlor, and the order of death of the husband and wife is a defeating contingency which can defeat the interests of either set of beneficiaries depending upon the husband and wife's order of death. (For more on defeating contingencies, please refer to the Guidelines beginning at page 8.)
Because the trust is tainted by a defeating contingency, should the bank fail when both settlors are alive, we would divide the trust funds in half, insuring half as if they were the individually-owned funds of the husband (for up to $100,000) and half as if they were the individually-owned funds of the wife (for up to $100,000). If, say, the husband already holds $100,000 in individually-owned funds at the same bank, the trust funds in excess of that $100,000, which are to be treated as his individually-owned funds, will be uninsured.
2. The bank fails after one settlor has died.
If the wife dies first, 70% goes outright to her nieces, nephews and friend (nonqualifying beneficiaries); the other 30% is for the husband's use during his lifetime, but upon his death this 30% passes outright to his children. Upon the death of the first spouse to die, the trust remains revocable (because the surviving spouse still has the power to revoke it), and the rules for revocable trusts continue to apply. Upon the death of the last settlor (here, the husband), the qualifying beneficiaries who will have a vested interest in the trust are the husband's children. Thus, if the bank fails when the surviving spouse (the husband) is still alive, the trust account will be insured for a maximum amount equal to the number of settlors then living (1) times the number of qualifying beneficiaries then living (let's assume there are 3) times $100,000, or $300,000. This is true whether the bank fails before or after the 70% has been distributed.
If the husband dies first, 30% passes outright to his children, 35% goes into an irrevocable trust (the terms of which are unknown), and 35% into a revocable trust for the benefit of the wife during her lifetime. Upon the wife's death this revocable trust is combined with the irrevocable trust, then distributed outright to the wife's nieces, nephews and friend.
The revocable trust rules pertains to the 30% and to the revocable 35% portion. For these portions, we ask what qualifying beneficiaries will have a vested interest in these portions upon the death of the last settlor. The answer is none, because upon the death of the last settlor (here, the wife), the remaining funds will be distributed to nonqualifying beneficiaries. For this reason, we would insure the revocable trust funds as if they were the wife's individually-owned account. (Of course, if the 30% had already been distributed to the husband's children by the time the bank failed, these funds would no longer be in the trust account at all and so, would not be insured). If the husband dies first but the wife is still living when the bank fails, we would insure the 35% in the irrevocable trust according to the irrevocable trust rules of 12 C.F.R. § 330.11 (copy enclosed). However, we can't apply these rules at present because we don't know what the terms of this irrevocable trust are. We also don't know whether the irrevocable trust remains irrevocable when it merges with the revocable 35%.
3. The bank fails after both settlors have died but before the final distribution has been made.
At this point, the trust is irrevocable, so the irrevocable trust rules will apply. Again, the order of death makes a difference in calculating the insurance coverage.
If the wife dies before the husband, then the husband dies, and then the bank fails, presumably the 70% has already been distributed before the bank fails; only the remaining 30% needs to be distributed, in this case to the husband's children. In this case, all of the beneficiaries' shares are non-contingent, and we can calculate each share that is viewed as coming from each settlor to each beneficiary, and insure each share for up to $100,000. Thus, if there are three children, and $100,000 is deemed to have come from each settlor for each child, then the trust will be insured for up to $600,000--that is, $100,000 per settlor per beneficiary for these non-contingent interests. (Please note, however, that the contingent interests of an irrevocable trust with two settlors are pooled and insured for up to $100,000 only.)
If the husband dies before the wife, then the wife dies, and then the bank fails, presumably the 30% has already been distributed before the bank fails; the 70% which remains comes under the irrevocable trust rules, and will be distributed outright to the wife's nieces, nephews and friend upon the wife's death. In this case, we would calculate the share viewed as coming from each settlor to each beneficiary (it does not matter that these beneficiaries are nonqualifying under the irrevocable trust rules). Because these shares are non-contingent, we would insure each for up to $100,000--that is, if there are two settlors and five beneficiaries (say, two nieces, two nephews and the friend), the trust would be insured for up to $1,000,000.
I hope that this information will prove useful to you. If you have any further questions, I can be reached at (202) 898-3859.