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FDIC Federal Register Citations

August 27, 2003

Mr. Robert E. Feldman,
Executive Secretary
Attention; Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17h Street, NW.
Washington, DC

Re: Proposed Deposit Insurance Regulations; Living Trust Accounts

Dear Mr. Feldman:

The Wisconsin Bankers Association (WBA) is the largest financial institution trade association in Wisconsin. WBA represents nearly 320 state and nationally chartered banks, savings banks and savings and loan associations located in communities throughout the state. In addition, WBA has a wholly owned subsidiary, FIPCO, which licenses documentation software and sells hard-copy forms to financial institutions in Wisconsin and other states. WBA appreciates this opportunity to comment on the proposed regulations regarding FDIC insurance coverage of revocable living trust accounts.

WBA understands there has been some confusion on the part of depositors and financial institution employees regarding the FDIC insurance coverage afforded payable on death accounts, including revocable living trusts. In an effort to avoid confusion on these and other FDIC insurance coverage regulations, WBA regularly conducts educational programs focusing on these issues.

WBA appreciates the concerns raised by FDIC regarding the confusion surrounding this category of insurance coverage. Unfortunately, neither proposed alternative effectively creates a simpler, less confusing system while still meeting the coverage expectations of depositors. However, WBA believes "Alternative One," subject to certain modifications, can achieve this goal. Therefore, WBA supports certain aspects of "Alternative one" and submits the following comments and suggestions to the FDIC today.

WBA Supports Proposed "Alternative One" With Modifications

WBA supports the FDICs proposed Alternative One, subject to the modifications discussed below, as it is the most effective means to reduce confusion about revocable trust accounts insurance coverage without reducing the expected level of coverage currently provided to such accounts.

Under current 12 CFR 330.10(f), if a revocable living trust includes a "defeating contingency" relative to a beneficiary's interest in the trust assets, insurance coverage will not be provided for that beneficiary's interest pursuant to the payable on death insurance coverage category. The FDIC cites the "defeating contingency" provision as the primary cause of confusion which, in some instances, results in the delay in payment of insurance to revocable living trust depositors.

While employees of institutions in Wisconsin discuss with revocable living trust depositors the defeating contingency concept regarding insurance coverage as outlined in the FDIC's brochures (which are given to depositors at account opening), WBA understands and shares the FDIC's desire to make insurance coverage determinations as quickly and simply as possible. Therefore, WBA fully supports elimination of the "defeating contingency" as is proposed in Alternative One. However, WBA unequivocally and vehemently opposes in either proposed alternative, any requirement for financial institutions to: (1) obtain any part of a trust document; (2) provide a certification of trust existence; and
(3) specifically identify a qualifying beneficiary's interest in trust assets or relationship to the grantor(s).

As is true in many other states, Wisconsin has a well-established statute that protects third persons from liability in dealing with trustees of trusts. Sec. 701.19(11), Ws. Stats., states:

Protection of third parties. With respect to a third person dealing with a trustee or assisting a trustee in the conduct of a transaction, the existence of trust power and its proper exercise by the trustee may be assumed without inquiry The third person is not bound to inquire whether the trustee has power to act or is properly exercising the power, and a third person, without actual knowledge that the trustee is exceeding the trustee's powers or improperly exercising them, is fully protected in dealing with the trustee as if the trustee possessed and properly exercised the powers the trustee purports to exercise. A third person is not bound to assure the proper application of trust property paid or delivered to the trustee.

In essence, this statute allows third parties, such as financial institutions, to rely on the trustee's statements, representations, and actions, as being proper without consequence of liability so long as the third party does not have actual knowledge to the contrary. As a result, most financial institutions in Wisconsin do not obtain, review or retain any part of a trust document to avoid having actual knowledge, thereby eliminating the possibility of liability to beneficiaries to act in accordance with terns of the trust. In light of this statute, WBA strongly objects to any requirement that would in any fashion jeopardize the protections given under sec. 701.19(11), Wis. Stats. WBA is certain that these protections would be jeopardized if the three requirements specifically identified above were included in the final regulation.

However, WBA does not take issue with obtaining certain administrative information from trustees regarding living trusts at account opening. In fact, WBA's wholly owned subsidiary, FIPCO, produces a copyrighted form, WBA 84 "Declaration of Trustee Designating Depository," for this very purpose. The document is signed by the trustee upon the trustee providing relevant information regarding the trust without causing the financial institution to have actual knowledge regarding specific provisions of the trust or the trustee's authority. This is a declaration by the trustee, not a certification by the financial institution, regarding the trust's existence.

WBA finds it absolutely inappropriate for a financial institution that is not the trustee of a trust to certify the existence of the trust. Such a requirement essentially imposes a duty on the institution to render a legal opinion of trust existence, which is not a practice of most financial institutions. In addition, such a requirement flies in the face of the long-standing protections afforded by sec. 701.19(11), Stats.

WBA also vehemently objects to any requirement for a deposit account record to specifically identify any beneficiary's "ownership" interest in trust assets or to specifically identify the beneficiary's relationship to the grantor. Notwithstanding the problems WBA has with this provision in the context of sec. 701.19(11), Wis. Stats., this particular requirement would also be difficult to fulfill due to the very nature of revocable living trusts. These trusts can be and are amended or revoked by grantors at anytime; however, grantors do not typically make it a point to notify depository institutions of such changes. Therefore, a deposit account record containing a specific breakdown of a beneficiary's interests as of a particular date may not be applicable on another date due to subsequent amendment or revocation.

While WBA understands that FDIC's motivation to change these regulations is due, in part, to its desire to expedite the payment of insurance proceeds, WBA believes it is simply not enough for FDIC to rely on information contained in deposit account records at an institution to determine how insurance proceeds are to be applied. Without further investigation, the proceeds may be applied incorrectly. Therefore, WBA believes the FDIC has a responsibility to its insured depositors to take the steps and time necessary to assure the proper application of insurance proceeds. This means going beyond deposit account records and, among other things, reviewing trust documents when circumstances warrant added investigation.

WBA also finds it unnecessary to identify the beneficiary's relationship to the depositor. There is no benefit to FDIC where a qualifying beneficiary is identified as "John Q. Public (brother of grantor)" versus "John Q. Public." WBA believes it is FDIC's current practice to verify whether a named beneficiary is one who qualifies for pass-through insurance coverage in its determination of proper application of insurance proceeds.

Thus, the FDIC should continue to do exactly what is does today - have the account owner certify the existence of the living trust and verify the beneficiary's eligibility for pass-through insurance purposes at the time the institution is closed. Only at that time can the FDIC be certain that the payment of insurance proceeds is based upon the current status of the trust.

For the reasons stated above, WBA supports Alternative One to the extent it eliminates "defeating contingencies" from the regulations governing revocable living trust account insurance coverage, subject to the modifications described.

WBA Strongly Objects to the Adoption of Proposed "Alternative Two"

Simply stated, the FDIC admits its proposed "Alternative Two" would reduce insurance coverage given to revocable living trust accounts. In many cases, revocable living trust depositors have chosen this trust structure specifically for the purpose of obtaining the benefits of pass-through insurance in order to protect trust assets. In essence, these depositors have relied upon the well-established regulations set forth by the FDIC. It is absolutely unacceptable for the rules to be changed by FDIC in the middle of the game when the result is adverse to the depositor. If "Alternative Two" were adopted these depositors would be left scrambling to close accounts at one institution and reestablish accounts at other institutions, including non-traditional financial service providers that are not regulated or insured by FDIC. WBA does not view such backlash as favorable under any circumstances and doubts the FDIC would either.

WBA also rejects proposed "Alternative Two" because of the certification requirement it would impose on financial institutions as explained in the discussion of WBA's position on Alternative One.


WBA applauds the attempts that FDIC has made to address misunderstandings about revocable living trust deposit account insurance coverage. WBA believes that Alternative One, subject to the modifications described earlier, is the preferable solution to relieve confusion and retain the current level of deposit account coverage realistically expected by revocable living trust depositors.

WBA appreciates the opportunity to comment on this important matter, and trusts the FDIC will seriously consider the recommendations we make today.

Harry J. Argue, CAE
Executive Vice President/CEO
Wisconsin Bankers Association
Madison, WI

Last Updated 09/02/2003

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