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

Home > Regulation & Examinations > Laws & Regulations > FDIC Law, Regulations, Related Acts



[Table of Contents] [Previous Page] [Next Page] [Search]

4000 - Advisory Opinions


Three Possible Scenarios for Deposit Insurance Coverage of a Family Revocable Inter-Vivos Trust Account

FDIC--93--70

October 1, 1993

Adrienne George, Attorney

This letter will confirm our telephone conversation of September 17, 1993, during which I explained how the trust funds in your revocable trust account--the [FAMILY] Revocable Inter Vivos Trust account--would be insured if the depository institution holding your trust account should fail.

As we discussed then, the trust account would be insured differently, depending upon who was alive when the bank failed. As you know, you and your husband are the settlors of the trust. Upon the death of the first settlor to die (whom the trust calls the "deceased settlor"), the trust funds will be divided among three sub-trusts--(1) the Survivor's Trust, (2) the Bypass Trust and (3) the Disclaimer Trust. Also upon the death of the deceased settlor, the Survivor's Trust remains revocable but the Bypass Trust and the Disclaimer Trust become irrevocable. This change is important because, when the insured depository institution fails, the FDIC looks to see whether each sub-trust is revocable or irrevocable. If a sub-trust is revocable, the FDIC will apply the revocable trust rules in calculating the insurance coverage. If a sub-trust is irrevocable, the FDIC will apply the irrevocable trust rules in making the insurance calculation.

In analyzing how your trust account would be insured, there are three possible scenarios to be considered.

1.  The bank fails when the two settlors and their two daughters are alive.

All three sub-trusts are revocable, so we should apply the revocable trust rules set forth in the Guidelines. I am enclosing a copy of this document, and its accompanying letter, for your use.

Survivor's Trust. Because the surviving settlor has a general power of appointment by will over the funds of this trust, whereby the funds can be diverted away from the two daughters, the Survivor's Trust contains a defeating contingency. For this reason, the funds held by the Survivor's Trust when the bank fails will be divided in half, with half insured for up to $100,000 as if they were the individually-owned funds of the husband, and half insured for up to $100,000 as if they were the individually-owned funds of the wife. Guidelines, pages 8-9. Because the trust funds attributed to each settlor would be aggregated with individually-owned funds held by the same person at the same institution, and because you wish to maximize the insurance coverage of the funds in your trust account, it would be unwise for you or your husband to hold any funds in an individually-owned account in the same bank as your trust account.

Bypass Trust. Here, we ask who has a vested interest in the trust funds upon the death of the last settlor. One daughter, [DAUGHTER #1], receives an interest in real estate if she is then living; however, the FDIC insures interests in deposits, not real estate. An equivalent interest is to go to your other daughter, [DAUGHTER #2]. If this interest is in the form of deposits, it would be an insurable interest. As for the residue, half of it will go to [DAUGHTER #1] if she survives the surviving spouse, while the other half will go to [DAUGHTER #2], provided that she survives the surviving spouse. (Other provisions, involving the grandchildren, specify what happens if [DAUGHTER #1 OR DAUGHTER #2] does not survive the surviving spouse, but she has children who do.) How these funds will be insured is discussed in the next section, on the Disclaimer Trust.

Disclaimer Trust. This sub-trust is identical to the Bypass Trust, at least in terms of what happens to its assets upon the death of the surviving settlor.

For this reason, if, when the bank fails, the settlors and both of their daughters are still alive, we would add the insurable interests of [DAUGHTER #1] in the Bypass Trust and Disclaimer Trust (calculated as if the bank had failed just after the death of the surviving settlor) and insure that amount for up to $200,000 (that is, each settlor can give an insurable interest of up to $100,000 to each daughter). We would then add together the insurable interests of [DAUGHTER #2] in the Bypass Trust and Disclaimer Trust (again calculated as if the bank had failed just after the death of the surviving settlor) and insure that amount for up to $200,000.

Thus, the maximum amount of trust funds that could be insured while the trust is revocable is $600,000, assuming that neither of the settlors holds any individually-owned account at the same bank, that the Survivor's Trust holds $200,000, [DAUGHTER #1'S] insurable interest in the Bypass Trust and the Disclaimer Trust amounts to $200,000, and [DAUGHTER #2'S] insurable interest in the Bypass Trust and the Disclaimer Trust amounts to $200,000. (Please keep in mind that, due to the tax considerations involved, an equal division among the three sub-trusts may not occur. Please consult your attorney as to what allocation among the three sub-trusts would be likely.)

2.  The bank fails when only one settlor but both daughters are living.

Upon the death of the first settlor to die, the Survivor's Trust remains revocable but the Bypass Trust and the Disclaimer Trust become irrevocable.

Survivor's Trust. Because the Survivor's Trust is revocable, we would apply the revocable trust rules. As before, there is a defeating contingency because the surviving spouse has a general power of appointment by will over the assets of this sub-trust. For this reason, we would insure the funds of the Survivor's Trust for up to $100,000, as if they were the individually-owned funds of the surviving spouse.

Bypass Trust and Disclaimer Trust. Because these two sub-trusts are now irrevocable, we would apply the irrevocable trust rules, which are set forth at 12 C.F.R. § 330.11. (I have enclosed a copy of the insurance rules for your use.)

With the exception of the income interest in the Bypass Trust, which is non-contingent, all of the other interests in the Bypass Trust and Disclaimer Trust are contingent (since they are to be distributed at the discretion of the trustee, not in any way that can be quantified using the Internal Revenue Service's life expectancy tables). According to 12 C.F.R. § 330.11, we would allocate the Bypass Trust's non-contingent income interest to each settlor pro rata (in proportion) to the contributions of each settlor to the trust, and insure each of these two amounts for up to $100,000. Then, we would add together all of the contingent interests (even if they belong to different beneficiaries) of the Bypass Trust and Disclaimer Trust, allocate this pooled amount pro rata to each settlor according to the contributions of each settlor to the trust, and insure each of these two amounts for up to $100,000.

3.  The bank fails when both settlors are deceased but their two daughters are still alive (and the daughters have not yet received their final distributions from the trust).

At this point, the whole trust is irrevocable, so the irrevocable trust rules apply.

Survivor's Trust. Once both settlors have died, we will know whether the surviving spouse exercised his or her power of appointment by will, and whether the beneficiaries' interests in this sub-trust are contingent or non-contingent.

Bypass Trust and Disclaimer Trust. Assuming that both daughters survive the settlors, each will have a non-contingent interest in these sub-trusts.

All three sub-trusts. According to 12 C.F.R. § 330.11, we should add together all of the contingent interests (if any) in these three sub-trusts, without regard to whether different beneficiaries are involved, allocate these pooled contingent interests to each settlor pro rata to his or her contributions to the trust, and insure each of these two amounts for up to $100,000. We should then take the total non-contingent interests of each beneficiary in these three sub-trusts, allocate these interests to each settlor pro rata to his or her contributions to the trust, and separately insure each of these amounts for up to $100,000. For instance, if the survivor died after failing to exercise her power of appointment so that everything in the Survivor's Trust went to her two daughters outright upon her death (via the Bypass Trust), and the other assets of the Bypass Trust and the assets of the Disclaimer Trust were also to go outright to the daughters upon the death of the surviving settlor, then all of the interests would be non-contingent. In this case, if the bank failed before final distribution to the two daughters, then the non-contingent interests of one daughter should be allocated between the two settlors according to their contributions to the trust, and each of those two amounts separately insured for up to $100,000, and the non-contingent interests of the other daughter should be allocated between the two settlors, and each of those two amounts separately insured for up to $100,000.

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


[Table of Contents] [Previous Page] [Next Page] [Search]

Last updated September 16, 2013 regs@fdic.gov