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FDIC Federal Register Citations

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Instituion 1

(millions)

Instituion 2

(millions)

Instituion 3

(millions)

Under Current Rules

Under Alternative One


Thus, it seems likely that some depositors would experience a

reduction in living trust account coverage under Alternative Two. A

grantor with over $100,000 in living trust assets can have the funds

fully insured, however, by placing up to $100,000 in different FDIC-

insured depository institutions using the same trust document.

The FDIC believes that eliminating the widespread confusion

surrounding the insurance coverage of living trust accounts would

warrant the rule change. We have found that one reason for the current

high percentage of uninsured living trust accounts at failed

institutions is depositor misunderstanding of the applicable deposit

insurance rules. As a result, the FDIC has found at recent depository

institution failures that depositors with living trust accounts were

unaware and surprised that they were uninsured, especially because they

had used an attorney to prepare the living trust. Alternative Two

eliminates the current confusion and provides a simple rule for

depositors to follow to ensure they are fully insured. As under

Alternative One, under Alternative Two the potential exists for far

less unintended uninsured funds compared to the existing rule. It is

predictable that, when informed of the new rules on the insurance

coverage of living trust accounts, depositors would take the necessary

steps to obtain the maximum available deposit insurance coverage.


To mitigate Alternative Two's potential effect of decreasing

coverage for some depositors, the FDIC would propose to provide a six-

month grace period after the effective date of the proposed rule.

Living trust accounts that exist on the effective date of the rule

change would continue to be insured under the former (per-beneficiary)

rules for six months. If the accounts are held in the form of time

deposits, then the grace period would be either until the maturity date

of the time deposits or six months, whichever is longer. Time deposits

renewed during the six-month grace period for the same dollar amount

and duration as the original deposit would be insured under the former

rules until the new maturity date. In some cases applying the proposed

rule might yield more coverage for a depositor than the depositor would

be entitled to under the former rules. In that situation the FDIC would

apply the rules more favorable for the depositor.


This six-month grace period would be analogous to the grace period

provided in the Federal Deposit Insurance Act for depositors who have

funds at merging depository institutions (12 U.S.C. 1818(q)). In

addition, if Alternative Two is ultimately adopted as a final rule, the

FDIC would take steps to inform the industry and the public of the rule

changes. In this connection, the FDIC is requesting comments on how

best to inform depositors of the revised rules for insuring living

trust accounts.

Procedural Requirements for Alternatives One and Two


As is currently the case for all revocable trust accounts, the

regulations would require that the deposit account be designated as a

revocable trust account (in this situation a living trust account). As

under the current POD rules, under Alternative One the rules would

require that the deposit account records of the institution indicate

the names of the trust beneficiaries and their ascertainable interests

in the trust. This would not be necessary under Alternative Two because

under that proposal insurance coverage is not based on trust

beneficiaries. Under Alternative One, when a depository institution's

deposit account records do not indicate the beneficiaries' names, the

living trust account would be insured as the grantor's single-ownership

funds to a combined limit of $100,000. This treatment would be the same

as at present for POD accounts that fail to satisfy the disclosure

requirements. The FDIC is proposing to retain the discretion to waive

these disclosure and recordkeeping requirements in order to ascertain,

upon an institution failure, whether a living trust actually exists

and/or to ascertain the identities of the trust beneficiaries and their

ownership interests in the trust. The purpose for this discretionary

waiver authority would be to prevent potential hardships to depositors

resulting from an institution's non-compliance with these procedural

requirements.

Under both alternative proposed rules the FDIC would require that,

when a depositor opens a living trust account, institutions certify in

their deposit account records the existence of the living trust. At

institution failures, FDIC staff 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. The delay in making deposit insurance payments

associated with this process could be avoided if the institution's

deposit account records confirmed the existence of the trust. The

institution would simply ask to see a copy of the trust and note in its

deposit account records that such a trust exists. For institutions that

conduct business by telephone or via the internet, this requirement

could be satisfied, for example, by having the depositor mail or fax a

copy of the first and last pages of the trust.

Although it is not an FDIC requirement, many institutions currently

retain a copy of the first and last pages of depositors' living trusts.

Obtaining a copy of the first and last pages of the trust would satisfy

an institution's obligation under both Alternative proposals to certify

the existence of a revocable living trust. This documentation, however,

would not satisfy the requirements under Alternative One that the

institution's records disclose the names of the qualifying

beneficiaries and their interests in the trust, unless that information

is actually provided on the pages of the trust document kept in the

institution's records. Preliminarily, the FDIC believes the

certification requirement would pose minimal inconvenience to

institutions. Specific comment is requested on this requirement.

III. Request for Comments

The FDIC requests comments on all aspects of the proposed

rulemaking. In particular, please indicate whether you prefer

Alternative One (living trust coverage of $100,000 per qualifying

beneficiary irrespective of defeating

[[Page 38650]]

contingencies) or Alternative Two (coverage of $100,000 per grantor of

a living trust) If you suggest another alternative, please provide the

details of that suggestion.

Alternative One would expressly require that depository

institutions' deposit account records indicate the ownership interests

of living trust beneficiaries. Although this is currently a requirement

for all revocable trust accounts where beneficiaries have unequal

interests, the FDIC does not normally rely on the institution's records

for this information because the FDIC must review the living trusts

themselves for defeating contingencies. Under Alternative One defeating

contingencies would be irrelevant for deposit insurance determinations;

thus, the FDIC would rely primarily on an institution's records to

ascertain the beneficiaries' trust interests. The FDIC requests comment

on this aspect of Alternative One. For example, should the FDIC specify

a particular form for this purpose? Also, a living trust sometimes

provides for different levels of beneficiaries whose interests in the

trust depend on certain conditions. Thus, in some situations it might

be infeasible to identify and indicate in a depository institution's

records the ownership interest of each beneficiary named in the trust.

The FDIC requests specific comment on how this situation should be

treated under Alternative One.

Current FDIC rules do not require that the institution's records

indicate the kinship relationship between a revocable trust account

owner and the trust beneficiaries. In this regard the rules require

only that the beneficiaries be named in the institution's deposit

account records. Adding this requirement would further expedite the

insurance-payment process when an institution fails, but would result

in an additional recordkeeping requirement for depository institutions.

The FDIC seeks specific comment on this option.

As noted above, if finalized, Alternative One might result in an

overall increase in deposit insurance coverage and Alternative Two

might result in reduced living trust account coverage for some

depositors. Please comment on these aspects of the rulemaking. Also, if

Alternative Two is adopted as a final rule, how should existing

depositors be informed of this possible reduction in coverage?

For both proposals the FDIC would require that depository

institutions certify the existence of a living trust when a depositor

opens a living trust account. Please comment on this aspect of the

proposed rulemaking. In particular, how should this requirement be

applied to telephone and internet customers?

IV. Paperwork Reduction Act

No collections of information pursuant to the Paperwork Reduction

Act (44 U.S.C. 3501, et seq.) are contained in the proposed rule.

Consequently, no information has been submitted to the Office of

Management and Budget for review.

V. Regulatory Flexibility Act

The FDIC certifies that this proposed rule would not have a

significant economic impact on a substantial number of small businesses

within the meaning of the Regulatory Flexibility Act (5 U.S.C. 605(b)).

The requirement under the proposed rule that insured depository

institutions certify the existence of a living trust when a depositor

establishes a living trust account would take an institution employee

no more than a few minutes. Even for a depository institution with a

high volume of living trust accounts, this requirement would have no

significant impact. Accordingly, the Act's requirements relating to an

initial regulatory flexibility analysis is not applicable.

VI. The Treasury and General Government Appropriations Act, 1999--

Assessment of Federal Regulations and Policies on Families

The FDIC has determined that the proposed rule will not affect

family well-being within the meaning of section 654 of the Treasury and

General Government Appropriations Act, enacted as part of the Omnibus

Consolidated and Emergency Supplemental Appropriations Act of 1999

(Public Law 105-277, 112 Stat. 2681).

List of Subjects in 12 CFR Part 330

Bank deposit insurance, Banks, banking, Reporting and recordkeeping

requirements, Savings and loan associations, Trusts and trustees.

For the reasons set forth in the preamble, the Board of Directors

of the Federal Deposit Insurance Corporation proposes to amend part 330

of title 12 of the Code of Federal Regulations as follows:

PART 330--DEPOSIT INSURANCE COVERAGE

1. The authority citation for part 330 continues to read as

follows:

Authority: 12 U.S.C. 1813(l), 1813(m), 1817(i), 1818(q), 1819

(Tenth), 1820(f), 1821(a), 1822(c).

Proposed Rule--Alternative One

2. Section 330.10(f) is revised to read as follows:

Sec. 330.10 Revocable trust accounts.

* * * * *

(f) Living trusts accounts. (1) This section also applies to

revocable trust accounts held in connection with a ``living trust'' (or

``family trust''), a formal revocable trust created by an owner/grantor

and over which the owner/grantor retains control during his or her

lifetime. If a named beneficiary in a living trust is a qualifying

beneficiary under this section, then the account held in connection

with the living trust is eligible for the per-qualifying-beneficiary

coverage described in paragraph (a) of this section. Notwithstanding

any other provisions of the section, such coverage shall be provided

irrespective of any conditions in the trust that might prevent a

beneficiary from ultimately acquiring a vested and ascertainable

interest in the deposit account upon the account owner's death.

(Example: Depositor A has a living trust account with a balance of

$300,000. The trust provides that, upon the grantor's death, the

grantor's husband shall receive $100,000 and each of her two children

shall receive $100,000, but only if they graduate from college by age

twenty-four. Assuming A has no other revocable trust accounts at the

same depository institution, the coverage on her living trust account

would be $300,000. The trust names three qualifying beneficiaries.

Coverage would be provided up to $100,000 per qualifying beneficiary

regardless of contingencies.)

(2) The rules in paragraph (c) of this section on the interest of

non-qualifying beneficiaries apply to living trust accounts.

(3) In order for a depositor to qualify for the living trust

account coverage provided under this paragraph (f), the title of the

account must reflect that the funds in the account are held pursuant to

a formal revocable trust. Also, the deposit accounts records of the

depository institution must indicate the names of the beneficiaries of

the living trust and their ownership interests in the trust. Upon the

closing of a depository institution, in its discretion the FDIC may

waive these disclosure and recordkeeping requirements in order to

ascertain whether a living trust actually exists and/or to ascertain

the identities of the trust beneficiaries and their ownership interests

in the trust.

(4) Insured depository institutions must certify in their deposit

accounts records the existence of a living trust

[[Page 38651]]

when a depositor opens a living trust account.

Proposed Rule'Alternative Two

2. Section 330.10(f) is revised to read as follows:

Sec. 330.10 Revocable trust accounts.

* * * * *

(f) Living trusts accounts. (1) Funds held in one or more accounts

established in connection with a ``living trust'' (or ``family trust'')

shall be separately insured up to $100,000 as to each owner/grantor of

the living trust, irrespective of the number of qualifying and non-

qualifying beneficiaries named in the living trust. A living trust is

defined generally as a formal revocable trust created by an owner/

grantor and over which the owner/grantor retains control during his or

her lifetime. (Example: Depositor A has $200,000 in a living trust

account. The living trust names A's two children as beneficiaries.

Assuming A has no other living trust accounts at the same depository

institution, A's insurance coverage would be $100,000 for the living

trust account. Because living trust coverage is limited to $100,000 per

owner, $100,000 of A's funds would be uninsured. If the living trust

had two owners/grantors, then the living trust account would be insured

to $200,000.)

(2) The insurance coverage for living trust accounts is separate

from the coverage provided under other provisions of this part,

including coverage for other types of revocable trust accounts.

(Example: Depositor A has $100,000 in a living trust account; $100,000

in a payable-on-death account (naming a qualifying beneficiary) and

$25,000 in a single-ownership account. Assuming A has no other accounts

at the same depository institution, A's insurance coverage would be

$100,000 for the living trust account, $100,000 for the POD account,

and $25,000 for the single-ownership account. Living trust coverage is

separate from a depositor's coverage on POD and single-ownership

accounts.)

(3) In order for a depositor to qualify for the living trust

account coverage provided under this paragraph (f), the title of the

account must reflect that the funds in the account are held pursuant to

a formal revocable trust.

(4) Insured depository institutions must certify in their deposit

accounts records the existence of a living trust when a depositor opens

a living trust account. (The current industry practice of maintaining

copies of the first and last pages of a depositor's living trust would

be one way to satisfy this requirement.)

(5) Living trust accounts that exist on [the effective date of this

amendment] shall continue to be insured under the FDIC's former rules

for the insurance coverage of living trust accounts for six months from

[the effective date of this amendment]. If the accounts are held in the

form of time deposits, then the grace period expires either upon the

maturity date of the time deposits or six months after [the effective

date of this amendment], whichever is later. Time deposits renewed

during the six-month grace period for the same dollar amount and

duration as the original deposit are insured under the former rules

until the new maturity date. If, however, during this grace period it

would be more beneficial for a depositor to be insured under the

amended rules than under the former rules, the FDIC shall apply the

rules more favorable for the depositor.

Dated: May 7, 2003.

By order of the Board of Directors of the Federal Deposit

Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

[FR Doc. 03-16400 Filed 6-27-03; 8:45 am]

BILLING CODE 6714-01-P

[Federal Register: June 30, 2003 (Volume 68, Number 125)]

[Proposed Rules]

[Page 38645-38651]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr30jn03-27]

=======================================================================

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 330

RIN 3064-AC54

Deposit Insurance Regulations; Living Trust Accounts

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice of proposed rulemaking.

--------------------------------------------------------------------------------------------------------------------------------------------------------

SUMMARY: The FDIC is publishing for notice and comment alternative

proposed rules to amend its deposit insurance regulations. The purpose

of the rulemaking is to clarify and simplify the regulations on the

insurance coverage of living trust accounts.

DATES: Written comments must be received by the FDIC not later than

August 29, 2003.

ADDRESSES: All comments should be addressed to Robert E. Feldman,

Executive Secretary, Attention: Comments/Legal ESS, Federal Deposit

Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.

Comments may be hand-delivered to the guard station located at the rear

of the 550 17th Street Building (located on F Street) on business days

between 7 a.m. and 5 p.m. (fax number: (202) 898-3838; or send by email

to comments@FDIC.gov). Comments may be inspected and photocopied in the

FDIC Public Information Center, Room 100, 801 17th Street, NW.,

Washington, DC 20429, between 9 a.m. and 4:30 p.m. on business days,

and the FDIC may post the comments on its Internet site at

http://www.fdic.gov/regulations/laws/federal/propose.html

.

FOR FURTHER INFORMATION CONTACT: Joseph A. DiNuzzo, Counsel, Legal

Division (202) 898-7349; Martin W. Becker, Senior Receivership

Management Specialist, Division of Resolutions and Receiverships (202)

898-6644; or Kathleen G. Nagle, Supervisory Consumer Affairs

Specialist, Division of Supervision and Consumer Protection (202) 898-

6541, Federal Deposit Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

One of the FDIC's paramount goals in the area of deposit insurance

is to ensure that depositors and insured depository institution

employees understand the FDIC's deposit insurance rules. To that end,

in July 1998, after an extensive review of the existing rules for

deposit insurance coverage, the FDIC simplified its entire deposit

insurance regulations. Also, in April 1999, the FDIC amended the rules

for the insurance coverage of joint accounts and payable-on-death

accounts to make them more easily understood.

Despite the FDIC's efforts to simplify and clarify the deposit

insurance regulations, there is still significant public and industry

confusion about the insurance coverage of living trust accounts. At

recent depository institution failures there has been a

disproportionately high percentage of uninsured living trust deposits,

when compared to the percentage of uninsured deposits in other

categories of coverage. The FDIC receives numerous calls daily from

bankers, members of the public and industry representatives indicating

their misunderstanding of the coverage for living trust accounts. As

discussed below, the confusion among bankers and the public about the

insurance coverage of living trust accounts is understandable.

A living trust is a formal revocable trust created by an owner

(also known as a grantor) and over which the owner retains control

during his or her lifetime. Upon the owner's death, the trust generally

becomes irrevocable. A living trust is an increasingly popular probate

instrument designed to achieve specific estate and tax planning goals.

A living trust account is subject to the FDIC's insurance rules on

revocable trust accounts. Section 330.10 of the FDIC's regulations (12

CFR 330.10) provides that revocable trust accounts are insured up to

$100,000 per ``qualifying'' beneficiary designated by the owner of the

account. If there are multiple owners of a living trust account,

coverage is available separately for each owner. Qualifying

beneficiaries are defined as the owner's spouse, children,

grandchildren, parents and siblings (12 CFR 330.10(a)).

The most common type of revocable trust account is the ``payable-

on-death'' (``POD'') account, sometimes referred to as a Totten Trust

account, comprised simply of a signature card on which the owner

designates the beneficiaries to whom the funds in the account will pass

upon the owner's death. The per-beneficiary coverage available on

revocable trust accounts is separate from the insurance coverage

afforded to any single-ownership accounts held by the owner or

beneficiary at the same insured institution. That means, for example,

if an individual has at the same insured bank or thrift a single-

ownership account with a balance of $100,000 and a POD account (naming

at least one qualifying beneficiary) with a balance of $100,000, both

accounts would be insured separately for a combined amount of $200,000.

If the POD account names more than one qualifying beneficiary, then

that account would be separately insured for up to $100,000 per

qualifying beneficiary (12 CFR 330.10(a)).

Separate, per-beneficiary insurance coverage is available for

revocable trust accounts only if the account satisfies certain

requirements. First, the title of the account must include a term such

as ``in trust for'' or ``payable-on-death to'' (or corresponding

acronym). Second, each beneficiary must be either the owner's spouse,

child, grandchild, parent or sibling. Third, the beneficiaries must be

specifically named

[[Page 38646]]

in the deposit account records of the depository institution. And

fourth, the account must evidence an intent that the funds shall belong

unconditionally to the designated beneficiaries upon the owner's death

(12 CFR 330.10(a) and (b)).

As noted, the most common form of revocable trust account is the

POD account, consisting simply of a signature card. With POD accounts,

the fourth requirement for per-beneficiary coverage does not present a

problem because the signature card normally will not include any

conditions upon the interests of the designated beneficiaries. In other

words, the signature card provides that the funds shall belong to the

beneficiaries upon the owner's death. In contrast, many living trust

agreements provide, in effect, that the funds might belong to the

beneficiaries depending on various conditions.

The FDIC refers to such conditions as ``defeating contingencies''

if they create the possibility that the beneficiaries may never receive

the funds following the owner's death. In the presence of a defeating

contingency, the revocable trust account is not entitled to separate

insurance coverage. Rather, the funds are aggregated with the funds in

any single-ownership accounts held by the owner at the same insured

depository institution and insured to a combined limit of $100,000 (12

CFR 330.10(c) and (f)).

Living trust accounts started to emerge in the late 1980s and early

1990s. At that time, the FDIC responded to a significant number of

questions about the insurance coverage of such accounts, often times

reviewing the actual trust agreements to determine whether the

requirements for per-beneficiary insurance were satisfied. In the

FDIC's review of numerous such trusts, it determined that many of the

trusts included conditions that needed to be satisfied before the named

beneficiaries would become the owners of the trust assets. For example,

some trusts required that the trust assets first be used to satisfy

legacies in the grantor's will; the remaining assets, if any, would

then be distributed to the trust beneficiaries. Other trusts provided

that, in order to receive any benefit under the trust, the beneficiary

must graduate from college. Because of the prevalence of defeating

contingencies among living trust agreements and the increasing number

of requests to render opinions on the insurance coverage of specific

living trust accounts, in 1994 the FDIC issued ``Guidelines for

Insurance Coverage of Revocable Trust Accounts (Including `Living

Trust' Accounts)'' (FDIC Advisory Opinion 94-32, May 18, 1994). The

Guidelines, which were revised in April 1999 to reflect changes to the

regulations (adding parents and siblings as qualifying beneficiaries),

provide a general explanation of the insurance coverage for revocable

trust accounts and a detailed explanation of how those rules apply to

living trust accounts. The subject of defeating contingencies is

explained at length in the Guidelines. The Guidelines are available at

the FDIC's Web site, www.FDIC.gov, and are available upon request from

the FDIC.

As part of its overall simplification of the deposit insurance

regulations, in 1998 the FDIC revised Sec. 330.10 to include a

provision explaining the insurance coverage rules for living trust

accounts (12 CFR 330.10(f)). That provision includes a definition of

defeating contingencies.

Despite the FDIC's issuance of guidelines on the insurance coverage

of living trust accounts and its inclusion of a special provision in

the insurance regulations explaining the coverage of these accounts,

there still is significant public and industry confusion about the

insurance of living trusts accounts.

Time has shown that the basic rules on the coverage of POD accounts

are not adaptable to living trust accounts. The POD rules were written

to apply to signature-card accounts, not lengthy, detailed trust

documents. Because living trust accounts and PODs are subject to the

same insurance rules and analysis, depositors often mistakenly believe

that living trust accounts are automatically insured up to $100,000 per

qualifying beneficiary without regard to any terms in the trust that

might prevent the beneficiary from ever receiving the funds. Our

experience indicates that in a significant number of cases that is not

so. Because of the existence of defeating contingencies in the trust

agreement, a living trust account often fails to satisfy the

requirements for per-beneficiary coverage. Thus, the funds in the

account are treated as the owner's single-ownership funds and, after

being added to any other single-ownership funds the owner has at the

same institution, insured to a limit of $100,000. The funds in a non-

qualifying living trust account with more than one owner are deemed the

single-ownership funds of each owner, with the corresponding

attribution of the funds to each owner's single-ownership accounts.

The FDIC believes the rules governing the insurance of living trust

accounts are too complex and confusing. Under the current rules, the

amount of insurance coverage for a living trust account can only be

determined after the trust document has been reviewed to determine

whether there are any defeating contingencies. Consequently, in

response to questions about coverage of living trust accounts, the FDIC

can only advise depositors and bankers that they should assume that

such accounts will be insured for no more than $100,000 per grantor.

Otherwise, the FDIC suggests that the owners of living trust accounts

seek advice from the attorney who prepared the trust document.

Depositors who contact the FDIC about their living trust insurance

coverage are often troubled to learn that they cannot definitively

determine the amount of their coverage without a legal analysis of

their trust document. Also, when a depository institution fails the

FDIC must review each living trust to determine whether the

beneficiaries' interests are subject to defeating contingencies. This

often is a time-consuming process, sometimes resulting in a significant

delay in making deposit insurance payments to living trust account

owners.

II. Alternative Proposed Rules

To address this situation, the FDIC is proposing to simplify the

insurance coverage rules for living trust accounts. The FDIC has

identified what it believes to be two viable alternatives to address

the confusion surrounding the insurance coverage of living trust

accounts.

Proposed Rule--Alternative One

The first alternative for simplifying and clarifying the insurance

rules for living trust accounts would be to provide coverage up to

$100,000 per qualifying beneficiary named in the living trust

irrespective of defeating contingencies (``Alternative One''). As

explained above, currently both POD and living trust accounts are

insured as revocable trust accounts and thus are subject to the same

rules. Alternative One would retain this parallel treatment of POD

accounts and living trust accounts by continuing to provide per-

qualifying-beneficiary coverage, but no longer requiring that a

beneficiary's interest in a living trust be free from defeating

contingencies.

Any conditions in the trust document affecting whether a

beneficiary would ultimately receive his or her share of the trust

assets would be irrelevant. The FDIC would identify the beneficiaries

and their ascertainable interests in the trust from the depository

institution's account records and provide coverage on the account up to

$100,000 per qualifying beneficiary, subject to the same rules that now

apply to POD accounts. For example, a deposit account for a living

trust naming three

[[Page 38647]]

qualifying beneficiaries (with equal ownership interests in the trust)

would be insured up to $300,000, as long as the account is designated

as a living trust account and the beneficiaries and their respective

interests in the trust are indicated in the institution's deposit

account records. This coverage would be the same as that afforded to a

POD account with three qualifying beneficiaries.

Under Alternative One, as currently the case, the insurance

coverage provided for living trust accounts would be under the same

category of coverage as POD accounts. Thus, all funds that a depositor

holds in both living trust accounts and POD accounts naming the same

beneficiaries would be aggregated for insurance purposes. For example,

assume a depositor has a living trust account for $200,000 in

connection with a living trust naming his children, A and B. If the

depositor also has a $200,000 POD account naming A and B, the combined

coverage on the two accounts would be $200,000.

As with POD accounts, under Alternative One insurance coverage

would be provided up to $100,000 per qualifying beneficiary limited to

each beneficiary's ascertainable interest in the trust. Thus, if a

living trust provided that upon the grantor's death one qualifying

beneficiary received $125,000 and another qualifying beneficiary

received $75,000, the coverage on a corresponding living trust account

with a balance of $200,000 would be $175,000. The process would be to

identify the number of qualifying beneficiaries, determine each

beneficiary's ascertainable interest in the trust, and insure the

account up to $100,000 per such interest. Here the first qualifying

beneficiary has an ascertainable interest of $125,000. Based on that

beneficiary's interest in the trust, $100,000 of the balance in the

account would be insured and $25,000 would be uninsured. The second

qualifying beneficiary has an ascertainable interest of $75,000, all of

which would be eligible for coverage.

This methodology for determining living trust account coverage

would be consistent with existing rules. The FDIC's insurance

regulations now base the coverage for revocable trust accounts on the

beneficiaries' interests. Typically with POD accounts the beneficiaries

have an equal ownership interest in the account; thus, the rules

indicate that such ownership interests are deemed equal unless

otherwise specified in the institution's deposit account records. With

living trusts, beneficiaries commonly have different ownership

interests. For example, the trust might provide that beneficiary A

receives $50,000 and beneficiary B receives $100,000. In order for the

FDIC to determine the insurance coverage for living trust accounts, it

is important that the institution's deposit account records indicate

each beneficiary's ownership interest in the trust. Thus, the proposed

rule expressly requires that the deposit account records of the

institution indicate the ownership interest of each beneficiary in the

living trust. The information could be in the form of the dollar amount

of each beneficiary's interest or on a percentage basis relative to the

total amount of the trust assets. If such information is not provided

in the institution's records, the FDIC would have the discretion to

review the living trusts upon a depository institution's failure to

obtain the necessary information, but this review process would

substantially slow the payment of insured deposits to living trust

account holders.

Because a living trust sometimes provides for different levels of

beneficiaries whose interests in the trust depend on certain

conditions, in some situations it might be infeasible to identify and

indicate in a depository institution's records the ownership interest

of each beneficiary. For example, a living trust might provide that,

upon the grantor's death, the grantor's spouse receives all of the

trust assets; but, if the spouse predeceases the grantor, then the

grantor's two children each receives fifty percent of the trust assets.

The FDIC requests specific comment on how this situation should be

treated under Alternative One. One option would be for the FDIC to deem

each beneficiary to have an equal share in a trust that provides for

multi-tiered beneficiaries.

Under Alternative One, as now with POD accounts, insurance coverage

would be affected by the existence of non-qualifying beneficiaries in

the living trust. The current rule is that the trust interest

attributable to a non-qualifying beneficiary is considered the

grantor's single-ownership funds and, along with any other single-

ownership funds held by the owner at the institution, insured to a

combined limit of $100,000. For example, a deposit account with a

balance of $300,000 held in connection with a living trust naming the

grantor's two children and nephew as beneficiaries would be insured up

to $200,000 as to the living trust account. The $100,000 attributed to

the non-qualifying beneficiary (the nephew) would be considered the

grantor's single-ownership funds. If the grantor has no other single-

ownership funds at the institution, the $100,000 attributed to the non-

qualifying beneficiary in the living trust account would be fully

insured under the single-ownership account category. If in this

example, however, the grantor also has a single-ownership account with

a balance of $50,000, then that amount would be added to the $100,000

from the living trust account (attributable to the non-qualifying

beneficiary) and insured to a combined limit of $100,000. Thus, overall

the depositor's funds would be insured for $300,000 and uninsured for

$50,000. Both examples would yield the same result as a similar POD

account with non-qualifying beneficiaries. As currently required for

all revocable trust accounts, the depository institution's deposit

account records would have to indicate the names of all the trust

beneficiaries.\1\

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\1\ The treatment also would be the same for PODs and living

trust accounts where there are no non-qualifying beneficiaries named

in the trust, but the balance in the account exceeds the maximum

available coverage. For example, if a grantor has a $200,000 living

trust account and there is only one qualifying beneficiary named in

the trust (and no non-qualifying beneficiaries), the coverage would

be limited to $100,000. As under current rules, the excess $100,000

would be uninsured. The result would be the same for a POD account

where the account balance exceeds the maximum insured amount

determined by the number of qualifying beneficiaries.

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The FDIC believes Alternative One would be an easily understood

rule on the insurance coverage of living trust accounts. Coverage would

no longer depend on defeating contingencies in the trust; thus,

depositors would have a clear understanding of their account coverage.

Also, assuming depository institutions' records contain the living

trust information required under Alternative One, the FDIC would be

able to make expeditious payments to insured depositors when an

institution fails.

Under Alternative One, in making deposit insurance determinations

upon an institution failure, the FDIC would rely primarily on a

depository institution's deposit account records to identify living

trust beneficiaries and their interests in the trust. As under current

procedures, the FDIC would request living trust account holders to sign

an affidavit on whether the identified beneficiaries are qualifying

beneficiaries (i.e., the grantor's spouse, child, grandchild, parent or

sibling) for purposes of determining the amount of deposit insurance.

In order to identify possible errors in institution documentation and

to avoid potential fraud, the FDIC also would review a percentage of

the living trusts underlying the respective living trust accounts.

[[Page 38648]]

Current FDIC rules do not require that the institution's records

indicate the kinship relationship between a revocable trust account

owner and the trust beneficiaries. In this regard the rules require

only that the beneficiaries be named in the institution's deposit

account records. As indicated, when an institution fails the FDIC

requests a revocable trust account depositor to provide an affidavit

specifying the relationship between the owner and each beneficiary,

indicating whether those individuals are qualifying beneficiaries. In

order to avoid the delay in paying claims caused by having depositors

provide such an affidavit when an institution fails, one option would

be for the FDIC to require institutions to obtain beneficiary

relationship information when a depositor opens or amends a living

trust or POD account. At that time the depositor would sign an

affidavit indicating whether each beneficiary is a qualifying

beneficiary. This additional information would further expedite

payments to living trust and POD depositors when an institution fails,

but would impose an additional recordkeeping requirement on depository

institutions. The FDIC seeks specific comment on this option.

One consequence of Alternative One is that it likely would result

in an increase in deposit insurance coverage. The reason is that,

unlike under the current rules, beneficiaries would not have to have an

unconditional interest in the trust in order for the account to be

eligible for per-qualifying-beneficiary coverage. For example, assume a

trust provided that upon the grantor's death the grantor's spouse would

receive $100,000 and each of the grantor's three children would receive

$100,000, but only if each graduated from college by age twenty-four.

Under Alternative One, the amount of coverage would be up to $400,000.

Under the current rules, because of the defeating contingency that each

of children graduates from college by age twenty-four, the maximum

coverage would be limited to $100,000. As indicated in the table below,

based on a sampling of accounts at recent depository institution

failures, FDIC staff found that under Alternative One there would have

been an increase in insured living trust deposits.

Table 1.--Sampling of Accounts Under Alternative One
  Instituion 1
(millions)
Instituion 2
(millions)
Instituion 3
(millions)
Total Living Trust Deposits $132 $175 $30
Total Insured Living Trust Deposits Under Current Rules 128 169 28
Total Insured Living Trust Deposits Under Alternative One 131 173 29

It is uncertain the extent to which Alternative One as a final rule

would increase the overall volume of insured deposits in the depository

institutions industry. One reason for the uncertainty is that no

industry-wide data are maintained on this type of deposit account.

Thus, it is unclear what, if any, effect an increase in insured living

trust deposits resulting from the issuance of Alternative One as a

final rule would have on the Bank Insurance Fund (``BIF'') and Savings

Association Insurance Fund (``SAIF'') reserve ratios. The reserve

ratios are determined by dividing the BIF and SAIF fund balances by the

estimated insured deposits held by BIF and SAIF members, respectively

(12 U.S.C. 1817(l)).

Proposed Rule--Alternative Two

The second alternative to address the confusion surrounding the

insurance coverage of living trust accounts is, in essence, to create a

separate category of coverage for living trust accounts and to insure

such accounts up to $100,000 per owner of the account (``Alternative

Two''). That individual would be insured up to a total of $100,000 for

all living trust accounts he or she has at the same depository

institution, regardless of the number of beneficiaries named in the

trust, the grantor's relationship to the beneficiaries and whether

there are any defeating contingencies in the trust. The deposit

insurance coverage for a living trust account would be separate from

the coverage afforded to any single-ownership accounts the owner may

have at the same depository institution. In addition, if that

individual also has a POD account, that account would be eligible for

separate, per-beneficiary POD coverage, regardless of the existence of

the living trust account (assuming the requirements for POD coverage

are met). Where there are joint owners of a living trust account, the

account would be insured up to $100,000 per grantor. Such insurance

would be separate from the available joint and single-ownership

coverage of each grantor.

For example, a depositor with $100,000 in a living trust account,

$100,000 in a POD account (naming a qualifying beneficiary) and

$100,000 in a single-ownership account would be fully insured as to

each account (assuming compliance with the applicable procedural

requirements). Under Alternative Two the coverage on a living trust

account would be separate from a depositor's coverage on other

categories of accounts, such as POD and single-ownership accounts.

The FDIC believes Alternative Two would make the deposit insurance

rules for living trust accounts simple and easy to understand. With

this knowledge, depositors would be able to make informed decisions on

how to obtain the maximum insurance coverage on living trust accounts.

In addition, depository institutions would not have to indicate in

their deposit account records the names of the trust beneficiaries and

their trust interests.

Also, under this proposal the FDIC would be able to pay insured

living trust account holders expeditiously when an institution fails.

Currently a significant percentage of living trust depositors must each

produce their living trust for FDIC review upon a depository

institution failure. This process delays the payment process and

sometimes results in privacy concerns raised by depositors. Alternative

Two would eliminate these issues because the FDIC would no longer need

to review the living trust to determine the names of the beneficiaries

and their ascertainable interests in the trust.

One consequence of this proposal is that it likely would result in

reduced coverage for trust account owners with living trusts naming

more than one qualifying beneficiary. For example, currently an account

for a living trust with one grantor and three qualifying beneficiaries,

with no defeating contingencies, would be eligible for coverage up to

$300,000. Under Alternative Two coverage on the account would be

limited to $100,000. As indicated in the table below, based on a

sampling of accounts at recent depository institution failures, FDIC

staff found that under Alternative Two there would have been a decrease

in insured living trust deposits.

[[Page 38649]]

Table 2.--Sampling of Accounts Under Alternative Two
 

Total Living Trust Deposits$132$175$30
Total Insured Living Trust Deposits 12816928
Total Insured Living Trust Deposits 13117329
Total Insured Living Trust Deposits Under Alternative Two12416823
Last Updated 06/30/2003 regs@fdic.gov

Last Updated: August 4, 2024