4000 - Advisory Opinions
What deposit insurance implications would come into play if a revocable trust agreement places conditions upon the distribution of funds following the death of an owner
November 5, 1997
Christopher L. Hencke, Counsel
This is in response to your inquiry regarding the insurance coverage of revocable trust accounts. Your inquiry originally was set forth in a letter dated June 27, 1997, addressed to the FDIC's office in Kansas City, Missouri. That office responded by letter dated August 20, 1997.
You presented a follow-up question in a letter dated August 25, 1997. That letter has been forwarded to this office. Your question involves a revocable trust agreement that places certain conditions upon the distribution of funds following the death of the owner.
The insurance coverage of revocable trust accounts is governed by 12 C.F.R. § 330.8. That section of the FDIC's insurance regulations provides in part as follows:
Funds owned by an individual and deposited into any account commonly referred to as a tentative or "Totten" trust account, "payable-on-death" account, revocable trust account, or similar account evidencing an intention that upon the death of the owner, the funds shall belong to such owner's spouse, or to one or more children or grandchildren of the owner, shall be insured in the amount of up to $100,000 in the aggregate as to each such named beneficiary, separately from any other accounts of the owner or the beneficiaries.
Under the rule quoted above, a revocable trust account will not qualify for separate insurance (i.e., separate from any single ownership accounts maintained by the owner at the same insured depository institution) unless the trust provides that the funds "shall belong" to one or more qualifying beneficiaries (i.e., the owner's spouse, children or grandchildren) upon the death of the owner. A trust agreement that provides that the funds might belong to qualifying beneficiaries--depending upon any "defeating contingencies"--is insufficient. The subject of "defeating contingencies" is discussed at length in FDIC Advisory Opinion 94--32 (May 18, 1994) (copy enclosed).
In this case, the trust agreement (as described in your letters) provides that the funds shall be distributed to each of several beneficiaries immediately upon the death of the owner unless a beneficiary at that time suffers from a legal disability. In the event of this contingency, the beneficiary's interest will be held for the benefit of the beneficiary by a trustee. "If such disabled beneficiary should die leaving no living descendants, the trust provides that the beneficiary's share is to be distributed to the trustmaker's then living descendants." Letter of June 27, 1997.
In the letter dated August 20, 1997, the FDIC addressed the question whether the conditions described above constitute a "defeating contingency." As previously mentioned, the subject of "defeating contingencies" is discussed in Advisory Opinion 94--32. That advisory opinion includes the following statements:
The FDIC defines a "vested interest" in the context of a revocable trust as . . . an interest where the beneficiary either receives an outright distribution of his share of the trust principal upon the death of the last settlor OR can invade the principal of his share to an unlimited extent at his or her demand from that time on OR where the beneficiary will eventually take his share outright, provided that he survives for a given number of years or to a certain age, or, if he does not so survive, provided that his share in the trust will pass to his estate or his heirs at his death. * * *
Holding off the outright distribution of funds . . . does not prevent a qualifying beneficiary with a vested interest from receiving the special insurance coverage of Section 330.8, provided that, if such a beneficiary does not survive for the given amount of time or reach the given age, the trust provides that his share will go to his estate or his heirs.
Advisory Opinion 94--32 at 4879--80, 4882.
In this case, the trust agreement does not provide that a disabled beneficiary's undistributed share "will go to his estate or his heirs" following the beneficiary's death. On the contrary, in those cases in which a "disabled beneficiary should die leaving no living descendants," the agreement provides that "the beneficiary's share is to be distributed to the trustmaker's then living descendants." Letter of June 27, 1997. In other words, the agreement provides that the funds will be distributed to the estate or heirs of the trustmaker as opposed to the estate or heirs of the beneficiary. As explained in the letter dated August 20, 1997, this possibility represents a "defeating contingency."
You have inquired as to whether the existence of an additional clause in the trust agreement would produce a different result. The clause provides as follows:
If a beneficiary should die before the complete distribution of his or her trust, the trust shall terminate and all of the trust property shall be distributed to such persons, corporations, or other entities, including the beneficiary's own estate, in the manner in which the beneficiary shall elect.
Letter of August 25, 1997.
The relationship between this clause and the other provisions in the trust agreement is not entirely clear to me. For example, I am uncertain as to when the beneficiary would exercise the power of appointment granted by this clause. During the lifetime of the trustmaker or settlor, the authority to control the funds in the revocable trust account would remain with the settlor. As a result, the beneficiary's power of appointment would be meaningless. (In the event of the death of the beneficiary, the settlor presumably would amend the revocable trust agreement. Please note that the estate of a deceased person would not be a qualifying beneficiary (spouse, child or grandchild) under 12 C.F.R. § 330.8.) After the death of the settlor, the beneficiary's share would be distributed immediately to the beneficiary with the result that the power of appointment would continue to be meaningless unless the beneficiary suffered from a legal disability. In that case, the beneficiary's share would be subject to the clause explained in your letter of June 27, 1997: "If [a] disabled beneficiary should die leaving no living descendants, the trust provides that the beneficiary's share is to be distributed to the trustmaker's then living descendants."
The clauses discussed above would produce conflicting results if a disabled beneficiary died with no living descendants but after having exercised his/her power of appointment. Under one clause, the funds would be payable to those persons or entities appointed by the beneficiary. Under another clause, the funds would be payable to the trustmaker's living descendants. You have not explained how the trust agreement would operate under these circumstances.
In any event, under the trust agreement as described in your letters, the interests of the beneficiaries are subject to the following contingency: if a beneficiary suffers from a legal disability at the time of the settlor's death, and if the beneficiary does not exercise his/her power of appointment and/or the beneficiary dies with no living descendants, any undistributed funds will not "go to his estate or his heirs" as required by the guidelines in Advisory Opinion 94--32. Rather, the funds will be distributed to the settlor's descendants. Under these circumstances, the interests of the beneficiaries are subject to a "defeating contingency." Thus, the additional clause explained in your letter of August 25, 1997, does not change the results explained in the FDIC's letter of August 20, 1997. This conclusion is based upon the fact that the clause at issue does not remove the possibility that the beneficiary's share might never be distributed to the beneficiary or his/her estate or heirs.
This opinion is based upon the facts set forth in your letters. Any difference between the trust provisions as described in your letters and the actual trust provisions could lead to a different conclusion. Also, please be advised that this legal opinion is not binding on the FDIC or its Board of Directors.