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FDIC Issues Insurance Guide for Trust Accounts
4/2/08
The FDIC recently published the Guide to Calculating Deposit Insurance Coverage for Revocable and Irrevocable Trusts. The Guide is intended to clarify the deposit insurance coverage rules that apply to trusts. This article will provide an overview of what is covered in the FDIC’s publication. Revocable and irrevocable trustsThe FDIC rules and the new publication deal with revocable trusts (formal and informal) and irrevocable trusts Revocable trusts allow the owner or creator of the trust to revoke, or terminate, the trust. Irrevocable trusts cannot be revoked or terminated by the owner or creator. Many irrevocable trusts start out as revocable trusts but became irrevocable when the owner or creator dies. A revocable trust is either formal or informal. A formal revocable trust (sometimes called a "living trust") is one that is created by separate documents devoted solely to the creation of the trust. An informal revocable trust is one that is created with a financial institution signature card. This is the common "pay-on-death" (POD) or "in-trust-for" account. For each of these types of trust accounts, the FDIC publication provides a step-by-step analysis that you can follow to determine the maximum amount of insurance coverage. The publication also works through a number of examples for each type of trust. While we can’t go into the level of detail that the publication does, we’ll touch on the high points and list the sorts of examples available in the publication. Insurance of informal revocable trustsThe publication restates the insurance rules for informal revocable trust accounts, which are not particularly difficult. Assuming that certain recordkeeping requirements are met, the maximum amount of deposit insurance coverage available for an informal revocable trust account with qualifying beneficiaries is the following formula: N(1) x N(2) x $100,000 N(1) is the number of owners of the account. N(2) is the number of “qualifying beneficiaries.” For example, if a husband and wife opened an account that is payable on death to three qualifying beneficiaries, the maximum amount of deposit insurance for this account would be calculated as follows: 2 (owners) x 3 (qualifying beneficiaries) x $100,000 = $600,000 It's important to know the definition of "qualifying beneficiaries." A qualifying beneficiary is a person who has any of the following relationships with any of the owners: spouse, child, grandchild, parent, or sibling. The FDIC applies the following rules in deciding whether a beneficiary qualifies:
The publication emphasizes that the FDIC rules do not prohibit an informal revocable trust account with a non-qualifying beneficiary. The FDIC rules only affect the insurance of such an account. An informal revocable trust account with no qualifying beneficiaries would be insured as a single ownership account of the owner and would be added together with all other single ownership accounts of the owner and insured up to $100,000. Here are the examples the FDIC publication works through in the area of revocable informal trusts:
Be sure to check the FDIC rules and publication for details on the recordkeeping rules, as well. Formal revocable trust accountsFormal revocable trust accounts are also called "living trusts." Again, living trusts are usually created by a separate written instrument rather than the financial institution signature card. The insurance coverage rules are basically the same for living trusts as for informal revocable trust accounts, meaning that there is $100,000 coverage per owner per qualifying beneficiary. Living trusts, however, sometimes have a characteristic that you don't find in informal revocable trusts and that affects insurance coverage. If the interest of any beneficiary depends upon the death of another beneficiary, then the insurance coverage is different. For example: B is the owner of a living trust account with a deposit balance of $200,000. The trust provides that, upon B's death, his wife shall receive $200,000 but, if the wife predeceases B, each of the two children shall receive $100,000. Assuming B has no other revocable trust accounts at the same depository institution and his wife is alive at the time of the institution failure, the coverage on his living trust account would be $100,000. The trust names only one beneficiary (B's spouse) who would become the owner of the trust assets upon B's death. If when the institution fails B's wife has predeceased him, then the account would be insured to $200,000 because the two children would be entitled to the trust assets upon B's death. [From the FDIC regulations] In other words, when a living trust has a beneficiary whose interest depends upon the death of another beneficiary, that dependent beneficiary is ignored for deposit insurance purposes. In other words, that person or entity is not viewed as a beneficiary when the FDIC is calculating the insurance limits on the account. The publication works through the following examples of living trusts:
Another feature that you will sometimes see in living trusts is a "life estate." If a beneficiary has a life estate, the beneficiary is entitled to some portion of the income or assets of the trust during that beneficiary's lifetime. Beneficiaries who acquire an interest after the death of the life estate beneficiary hold "remainder" interests. A life estate for a beneficiary presents a problem for insurance calculation purposes because it is impossible to know how much the beneficiary will receive from the trust. According to the FDIC publication, the insurance calculation should assume, unless the trust documents state otherwise, that the life estate beneficiary’s interest is equal to the average interest of all the trust beneficiaries. For example, if there is one life estate beneficiary and four remainder beneficiaries, there are a total of five beneficiaries. The average interest for any one of these beneficiaries is 20% (100% divided by five). If all the beneficiaries' interests are equal (or are treated as such), and all of the beneficiaries are qualifying beneficiaries, then the calculation of the maximum insurance is the same as that for an informal revocable trust. You multiply the number of owners by the number of qualifying beneficiaries and then multiply that by $100,000. More complicated rules apply if the remainder beneficiaries' interests are not equal (because the trust specifies unequal shares). See the FDIC publication starting on page 59 for details. Irrevocable trust accountsThe insurance coverage rules for irrevocable trust accounts do not make a distinction between qualifying and non-qualifying beneficiaries. Instead, they make a distinction between contingent and non-contingent interests. Insurance coverage is provided on a per-beneficiary basis for non-contingent interests and the non-contingent interest for each beneficiary is insured separately up to $100,000. Contingent interests are added together and the total is insured up to $100,000. The FDIC regulations define a non-contingent interest as: ... a trust interest capable of determination without evaluation of contingencies except for those covered by the present worth tables and rules of calculation for their use set forth in § 20.2031-7 of the Federal Estate Tax Regulations (26 CFR 20.2031-7) or any similar present worth or life expectancy tables which may be adopted by the Internal Revenue Service. The publication gives the following examples of contingent interests:
The difference in the rules between irrevocable trusts and living trusts can make a big difference in the insurance coverage. For example, suppose that Mrs. Green establishes a living trust naming her five children as beneficiaries, but stating that each child must reach the age of 21 in order to claim an equal share in the trust. While Mrs. Green is alive, the account is insured up to $500,000, since each of the five children is a qualifying beneficiary. But if the trust becomes irrevocable upon the death of Mrs. Green, the maximum insurance is only $100,000. This is because each beneficiary's interest is contingent upon the beneficiary reaching the age of 21 and, therefore, not separately insured once the account becomes an irrevocable trust. ConclusionRemember that the FDIC publication goes into much more detail and provides many more examples than we have included in this article. If you deal with the deposit insurance of trust accounts with any frequency, we would strongly encourage you to read the FDIC publication in its entirety. Train your staff on the deposit insurance rules with Compliance University™ On-Line Learning |
