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Each depositor insured to at least $250,000 per insured bank

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4000 - Advisory Opinions


Insurance Coverage For Revocable Trust With Contingency

FDIC-90-30

August 1, 1990

Adrienne George, Attorney

I am writing in response to your June 28, 1990 letter concerning the above-mentioned matter, and to confirm the various telephone conversations that I have had with your client, ***.

*** has informed me that he and his wife hold two revocable trust accounts in the same bank. *** is the settlor of one of the trusts, his wife *** is the settlor of the other trust, and *** and *** are the co-trustees for each of the trusts. In addition, *** assures me that he has no accounts other than these two revocable trust accounts in this bank, and that his wife's trust (which I have never seen) is the mirror image of his trust.

The *** intend to take out two $100,000 certificates of deposit, putting one in the name of *** as Co-Trustees under the *** Revocable Trust Agreement dated April 21, 1988, "and the other in the name of *** and *** as Co-Trustees under the *** *** Revocable Trust Agreement dated April 21, 1988."

You ask how the FDIC would insure these revocable trust accounts. The answer is that, due to a defeating contingency in the trust documents, each trust will be insured as if its funds consisted of the individually-owned funds of the given settlor, either *** or ***. This means that the trust funds in *** trust will be aggregated with any individual-owned funds he holds in the same bank, and the entire amount insured up to $100,000. Likewise, the trust funds in *** trust will be aggregated with any individually-owned funds she holds in the same bank, and that entire amount insured up to $100,000. Because it appears that the revocable trust accounts are the only two accounts which the *** hold in this particular bank, each trust would be insured up to $100,000. The explanation for this result follows.

The savings and loan reform legislation enacted on August 9, 1989 transferred the functions of the Federal Savings and Loan Insurance Corporation (FSLIC) to the Federal Deposit Insurance Corporation (FDIC). That legislation required the FDIC to prescribe, by May 5, 1990, uniform rules governing deposit insurance coverage that will apply to deposits in both banks and savings and loan associations (hereinafter "savings associations") with effective notice to depositors. The FDIC adopted such rules on April 30, 1990, with most of such rules (including the rule concerning revocable trusts) scheduled to take effect on July 29, 1990.

The new regulation on revocable trusts follows:

(a)  General rule. 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. Such intention must be manifested in the title of the account using commonly accepted terms such as, but not limited to, "in trust for," "as trustee for," "payable-on-death to," or any acronym therefor, and the beneficiaries of the account must be specifically named in the deposit account records of the insured depository institution. The settlor of a revocable trust account shall be presumed to own the funds deposited into the account.

12 C.F.R. §330.8.

In computing the amount of insurance coverage due a revocable trust, the FDIC looks at the state of the trust upon the settlor's death. At this point, the FDIC looks to see which beneficiaries are qualifying beneficiaries (i.e., which are the spouse, child or grandchild of the settlor) and which of these qualifying beneficiaries have a vested or non-contingent interest in the trust. Only beneficiaries that are both qualifying and who have a vested interest upon the settlor's death trigger the special insurance coverage provided by 12 C.F.R. §330.8.

The *** Revocable Trust establishes a Marital Trust, a Qualified Trust and a Family Trust upon the death of the settlor. The settlor's spouse is the beneficiary of the Marital Trust; however, it appears that her interest in such trust is not vested upon the settlor's death, because a later clause says that, unless the settlor's spouse survives him for nine months, "she shall be deemed to have predeceased Grantor for all purposes under this Trust." *** Revocable Trust, Article XIII, page 33. Because the Marital Trust is to be formed only if the settlor's spouse survives him, and because his spouse is to be deemed to have survived him only if she survives him for nine months (since otherwise she will be deemed to have predeceased him), the Marital Trust will be formed only if his spouse survives him for nine months. For this reason, his spouse's interest in the Marital Trust is merely contingent, the special insurance coverage provided by 12 C.F.R. §330.8 will not be triggered, and any funds attributable to the Marital Trust will be insured as if they were the individually-owned funds of the settlor.

Similarly, the settlor's spouse has only a contingent interest in the Qualified Trust, since that trust is to be formed only if the settlor's spouse survives the settlor for six months. Id., Article III, page 9. Thus, here, too, the special insurance coverage of 12 C.F.R. §330.8 will not be triggered, and any funds attributable to the Qualified Trust will be insured as if they were the individually-owned funds of the settlor.

As for the Family Trust, it is established upon the death of the settlor. While the settlor's wife is living, the beneficiaries are the wife and the issue of the settlor who are living from time to time. During this period, the trustee has the sole discretion to make payments from the net income and principal of the trust to one or more (or none) of the beneficiaries for certain purposes. Because none of the beneficiaries has a right to such payments, however, their interest at this point is contingent rather than vested.

A change in the Family Trust occurs "[a]t such time as there is no living child of the Grantor who is under the age of twenty-five (25) years, or upon the death of the survivor of the Grantor and his said wife, whichever occurs last." Id., Article III, page 15. At this point, the trustee is to divide the Family Trust into equal shares, one share for each of the settlor's children then living and one share for the then living issue of each deceased child of the settlor. For a time, the trustee has the sole discretion to make payments of income and principal for certain purposes to these beneficiaries; however, a living child of the settlor can get up to one-third of the principal of his share when he reaches each of the ages of 30, 35 and 40, and, at such time as there is no living child of a deceased child of the settlor who is under the age of 25, the trustee is to divide the pertinent share (that portion reserved for the then living issue of that deceased child of the settlor) into one share for each then living child of the settlor's deceased child and distribute it outright to the then living issue of the settlor's deceased child per stirpes or, if no such issue be living, to the issue of the settlor per stirpes.

For insurance purposes, the FDIC would look to the state of the Family Trust upon the settlor's death. At this point, the settlor's wife may or may not be alive, and the settlor's children then living may or may not be under age 25. However, the Family Trust is not divided into shares (creating certain vested interests) until both the settlor and his wife have died and there is no living child of the settlor under 25. Thus, there will be vested interests in the Family Trust after the settlor's death only if, at some point, the settlor and his wife have died and there is no living child of the settlor under 25. Thus, at the settlor's death, the beneficiaries of the Family Trust will have only contingent, not vested, interests. For this reason, any funds which would eventually be allocated to the Family Trust will not receive the special insurance coverage provided by 12 C.F.R. §330.8; instead, they will be insured as if they were the individually-owned funds of the settlor.

For this reason, all of the trust funds of the *** Revocable Trust will be treated as the individually-owned funds of the settlor and will be aggregated with any individually-owned accounts which the settlor holds in the same bank (it is my understanding that there are no such individually-owned funds involved here), and that the entire amount will then be insured up to $100,000. Assuming that the *** Revocable Trust is simply the mirror image of her husband's trust, her trust funds will be insured in the same way, as if they were her individually-owned funds. Thus, each trust will be separately insured up to a maximum of $100,000, for a total of $200,000 of insurance coverage.

I hope that this information will be useful to you. If I can be of any further help, I can be reached at (202) 898-3859.


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