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FDIC Federal Register Citations

August 29, 2003

Mr. Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429

Re: Deposit Insurance Regulations; Living Trust Accounts 68 FR 38645 (June 30, 2003)

Dear Mr. Feldman:

America’s Community Bankers (“ACB”)1 is pleased to comment on the Federal Deposit Insurance Corporation’s (“FDIC”) proposed rule amending its deposit insurance regulations.2 The goal of the proposal is to alleviate public and industry confusion about the insurance of living trust accounts by proposing two simpler alternatives. The first alternative would provide up to $100,000 of coverage per qualifying beneficiary named in the living trust irrespective of any defeating contingencies that the trust may contain. Alternative Two would create a separate category of coverage for living trust accounts and would insure such accounts up to $100,000 per owner of the account regardless of the grantor’s relationship to the beneficiaries or the presence of any conditions.

The FDIC believes that under the current rule, depositors often mistakenly believe that living trust accounts are automatically insured up to $100,000 per beneficiary without regard to the beneficiary’s relationship to the grantor or any terms in the trust that might prevent the beneficiary from ever receiving the funds. As a result, living trust accounts often fail to satisfy the requirements for per beneficiary coverage because of the specific terms of the trust. In order for these accounts to receive the benefit of per beneficiary deposit insurance coverage, the trust must satisfy the definitions in the FDIC regulations. If the trust does not comply with the definitions, the funds in the trust account are added to the grantor’s other single ownership funds held at the same institution and are insured in aggregate up to $100,000.

ACB Position

ACB supports efforts to simplify deposit insurance rules for living trust accounts and we generally support the direction of FDIC’s proposed Alternative One. It is important to make deposit insurance rules easy to understand, yet any changes should not impose additional burdensome recordkeeping requirements on financial institutions. We are concerned that both proposed alternatives would require institutions to “certify” the existence of a living trust when a depositor opens a living trust account.

The Certification Requirement Would Impose An Unnecessary Recordkeeping Requirement

Under both alternatives described in the proposal, banks would be required to certify the existence of a living trust when opening a living trust account. The FDIC believes that this requirement would help expedite the distribution of insurance proceeds following a bank failure by enabling the FDIC to rely on an institution’s account records.

• We do not believe that this would be a prudent alternative to current practice.

• We are concerned that the term “certification” could be interpreted to require bank personnel to render a virtual legal opinion as to the trust’s validity. While the certification requirement may be less of a concern for banks with large trust departments, new accounts representatives in community banks do not have the resources to complete such a task.

In the unlikely event of a bank failure, the FDIC must confirm the existence of a living trust in order to provide coverage for the corresponding deposit account. Currently, this is done by asking the depositor to present a copy of the trust. We understand that requesting a copy of the trust document is time consuming, but we do not believe the process should be abandoned.

Just because a bank has “certified” that a living trust exists at account opening does not mean that the document meets the requirements for a living trust in a particular state. Furthermore, living trusts are freely revocable during the grantor’s lifetime and certification would not ensure that a valid trust still exists when an institution fails.

Therefore, we do not believe that consumers would receive any tangible benefit from this requirement nor do we believe that there is any regulatory reason to require banks to certify the existence of a living trust. The FDIC would still have to request a copy of the trust document before any insurance funds could be disbursed.

We also believe that imposing a certification requirement would unreasonably interfere with an institution’s internal procedures. As a matter of good business practice, financial institutions obtain evidence of a living trust before proceeding to establish a living trust account. How institutions acquire this information varies widely. Some photocopy the entire document, some copy the first and last page, and others do not keep any copies of the trust document. Occasionally, institutions do not review the trust document at all and opt to obtain a copy of the certificate of trust 3 or obtain a certification from the depositor regarding the grantor, trustee, and the successor trustee. Each of these approaches enables an institution to document that it has gathered evidence that a living trust exists when a corresponding deposit account is opened. However, this evidence gathering process is very different from the proposed requirement that banks certify in their deposit account records that a living trust exists.

The preamble to the proposal indicates that retaining a photocopy of the first and last page would satisfy an institution’s certification obligation. We do not understand how maintaining these copies would help simplify the deposit insurance rules or speed the distribution of insurance proceeds. Not only are living trusts freely revocable, the first and last page of these documents would be insufficient for the FDIC to determine whether a living trust exists at the time an institution fails.

Institutions choosing not to maintain photocopies of trust instruments cite possible privacy issues and storage challenges associated with housing complex legal documents that often exceed 100 pages. Some institutions are concerned that keeping a copy of the trust would bind the bank to abide by the trust’s terms.

We believe that requiring insured depository institutions to maintain a trustee’s and/or a grantor’s contact information would be more appropriate than the proposed certification requirement. Because living trusts are revocable and amendable, we believe it would be unwise to rely on an institution’s account records for insurance distribution purposes.

Bank failures occur infrequently and the burden of the proposed certification requirement would outweigh any benefit to FDIC staff. Maintaining grantor and trustee information would not substantially depart from current industry practice and would enable FDIC staff to contact the person or persons most able to provide trust information. When an institution is taken into receivership, the FDIC could also require grantors, trustees, or their legal counsel to complete a form certifying the existence of a living trust. This approach would speed the distribution of insurance funds and would reflect the revocable and amendable nature of living trusts.

Alternative One Would Be In The Best Interest of Community Banks And Their Depositors

Alternative One removes the requirement that a beneficiary’s interest be free from defeating contingencies in order to receive pass-through insurance coverage. ACB strongly supports the removal of this requirement because it has been a significant source of confusion for depositors and bank personnel.

While Alternative One addresses current problems associated with defeating contingencies, the beneficiaries of a living trust still must be qualifying beneficiaries in order to receive pass-through insurance coverage. To qualify, a beneficiary must be a grantor’s spouse, child, grandchild, parent, or sibling. For many trusts, the grantor, trustee, and the beneficiary are the same person, thereby triggering the individual or joint insurance category. ACB believes that there is still confusion on this point and that further educational efforts would be needed if Alternative One were to be adopted.

Under Alternative One, the FDIC would rely on a depository institution’s deposit account records to identify living trust beneficiaries, their interest in the trust, and possibly their relationship to the grantor. Recording this level of detail would substantially depart from current practice and would impose additional recordkeeping requirements. Banks do not currently record such detailed beneficiary information because it is not material to the bank. Moreover, customers increasingly are using living trusts as a testamentary substitute and do not want to disclose the particulars of their estate plans to anyone, even their banker.

In addition to the challenge posed by obtaining beneficiary information, living trusts are amendable and beneficiaries can be added and deleted. As a result, we do not believe that the FDIC could reasonably rely on an institution’s account records concerning a trust’s beneficiaries, their trust interest, and their relationship to the grantor.

In the event that institutions are required to retain detailed beneficiary information, we would strongly encourage the FDIC to develop a model form that would place the burden of recording accurate beneficiary information on the grantor or the trustee. The grantor would complete the form and certify its accuracy. Any such requirement should only apply prospectively.

Simplified Regulations Should Not Result In Decreased Coverage

While Alternative One has flaws, we believe that it is preferable to Alternative Two. While Alternative Two would be the easiest to understand and would impose the least recordkeeping burden, we do not believe that simplified deposit insurance regulations should come at the expense of decreased deposit insurance coverage for revocable trusts with more than one beneficiary. Furthermore, without per beneficiary insurance coverage, depositors may take their funds out of insured depository institutions and place them into investment accounts or other financial mechanisms that would provide a greater return on their funds.

Informing Consumers

To inform consumers of any changes in the deposit insurance rules, we suggest that the FDIC:

• Provide a revised deposit insurance brochure that banks may give to customers opening a revocable trust account or customers who ask about insurance coverage. If banks are required to obtain beneficiary information, a brochure would allow institutions to show customers that recording such information is required by the FDIC.

• Provide a contact information form with information the FDIC would need to contact the grantor or trustee in the event of a bank failure.

• Update the EDIE web and software products to enable bank personnel to estimate deposit insurance coverage for living trust accounts.

• Communicate any changes to attorneys, accountants, and financial planners.


ACB appreciates the opportunity to comment on this important matter. Should you have any questions or concerns, please contact the undersigned.

1 America's Community Bankers represents the nation's community banks. ACB members, whose aggregate assets total more than $1 trillion, pursue progressive, entrepreneurial and service-oriented strategies in providing financial services to benefit their customers and communities.
68 Fed Reg. 38645 (June 30, 2003).
A certificate of trust is a summary of a trust that contains the name of the trust, the date, the grantor, trustees, and successor trustees.  It does not contain any information about the beneficiaries or their interests.  Many people use this as a way of showing that a trust exists because it does not disclose the terms of the trust.

Charlotte M. Bahin
Senior Vice President
Regulatory Affairs
America's Community Bankers


Last Updated 09/02/2003

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