| August 29, 2003
Mr. Robert E. Feldman
Executive Secretary
Attention: Comments/Legal ESS
Federal Deposit Insurance Corporation
550 17th Street, NW
Washington, D.C. 20429
Re: Deposit Insurance Regulations; Living Trust Accounts 68 FR 38645
(June 30, 2003)
Dear Mr. Feldman:
America’s Community Bankers (“ACB”)1 is pleased
to comment on the Federal Deposit Insurance Corporation’s (“FDIC”)
proposed rule amending its deposit insurance regulations.2
The goal of the proposal is to alleviate public and industry confusion
about the insurance of living trust accounts by proposing two simpler
alternatives. The first alternative would provide up to $100,000 of
coverage per qualifying beneficiary named in the living trust
irrespective of any defeating contingencies that the trust may contain.
Alternative Two would create a separate category of coverage for living
trust accounts and would insure such accounts up to $100,000 per owner
of the account regardless of the grantor’s relationship to the
beneficiaries or the presence of any conditions.
The FDIC believes that under the current rule, depositors often
mistakenly believe that living trust accounts are automatically insured
up to $100,000 per beneficiary without regard to the beneficiary’s
relationship to the grantor or any terms in the trust that might prevent
the beneficiary from ever receiving the funds. As a result, living trust
accounts often fail to satisfy the requirements for per beneficiary
coverage because of the specific terms of the trust. In order for these
accounts to receive the benefit of per beneficiary deposit insurance
coverage, the trust must satisfy the definitions in the FDIC
regulations. If the trust does not comply with the definitions, the
funds in the trust account are added to the grantor’s other single
ownership funds held at the same institution and are insured in
aggregate up to $100,000.
ACB Position
ACB supports efforts to simplify deposit insurance rules for living
trust accounts and we generally support the direction of FDIC’s proposed
Alternative One. It is important to make deposit insurance rules easy to
understand, yet any changes should not impose additional burdensome
recordkeeping requirements on financial institutions. We are concerned
that both proposed alternatives would require institutions to “certify”
the existence of a living trust when a depositor opens a living trust
account.
The Certification Requirement Would Impose An Unnecessary
Recordkeeping Requirement
Under both alternatives described in the proposal, banks would be
required to certify the existence of a living trust when opening a
living trust account. The FDIC believes that this requirement would help
expedite the distribution of insurance proceeds following a bank failure
by enabling the FDIC to rely on an institution’s account records.
• We do not believe that this would be a prudent alternative to
current practice.
• We are concerned that the term “certification” could be interpreted
to require bank personnel to render a virtual legal opinion as to the
trust’s validity. While the certification requirement may be less of a
concern for banks with large trust departments, new accounts
representatives in community banks do not have the resources to complete
such a task.
In the unlikely event of a bank failure, the FDIC 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. We understand that requesting
a copy of the trust document is time consuming, but we do not believe
the process should be abandoned.
Just because a bank has “certified” that a living trust exists at
account opening does not mean that the document meets the requirements
for a living trust in a particular state. Furthermore, living trusts are
freely revocable during the grantor’s lifetime and certification would
not ensure that a valid trust still exists when an institution fails.
Therefore, we do not believe that consumers would receive any
tangible benefit from this requirement nor do we believe that there is
any regulatory reason to require banks to certify the existence of a
living trust. The FDIC would still have to request a copy of the trust
document before any insurance funds could be disbursed.
We also believe that imposing a certification requirement would
unreasonably interfere with an institution’s internal procedures. As a
matter of good business practice, financial institutions obtain evidence
of a living trust before proceeding to establish a living trust account.
How institutions acquire this information varies widely. Some photocopy
the entire document, some copy the first and last page, and others do
not keep any copies of the trust document. Occasionally, institutions do
not review the trust document at all and opt to obtain a copy of the
certificate of trust 3 or obtain a certification
from the depositor regarding the grantor, trustee, and the successor
trustee. Each of these approaches enables an institution to document
that it has gathered evidence that a living trust exists when a
corresponding deposit account is opened. However, this evidence
gathering process is very different from the proposed requirement that
banks certify in their deposit account records that a living trust
exists.
The preamble to the proposal indicates that retaining a photocopy of
the first and last page would satisfy an institution’s certification
obligation. We do not understand how maintaining these copies would help
simplify the deposit insurance rules or speed the distribution of
insurance proceeds. Not only are living trusts freely revocable, the
first and last page of these documents would be insufficient for the
FDIC to determine whether a living trust exists at the time an
institution fails.
Institutions choosing not to maintain photocopies of trust
instruments cite possible privacy issues and storage challenges
associated with housing complex legal documents that often exceed 100
pages. Some institutions are concerned that keeping a copy of the trust
would bind the bank to abide by the trust’s terms.
We believe that requiring insured depository institutions to maintain
a trustee’s and/or a grantor’s contact information would be more
appropriate than the proposed certification requirement. Because living
trusts are revocable and amendable, we believe it would be unwise to
rely on an institution’s account records for insurance distribution
purposes.
Bank failures occur infrequently and the burden of the proposed
certification requirement would outweigh any benefit to FDIC staff.
Maintaining grantor and trustee information would not substantially
depart from current industry practice and would enable FDIC staff to
contact the person or persons most able to provide trust information.
When an institution is taken into receivership, the FDIC could also
require grantors, trustees, or their legal counsel to complete a form
certifying the existence of a living trust. This approach would speed
the distribution of insurance funds and would reflect the revocable and
amendable nature of living trusts.
Alternative One Would Be In The Best Interest of Community Banks And
Their Depositors
Alternative One removes the requirement that a beneficiary’s interest
be free from defeating contingencies in order to receive pass-through
insurance coverage. ACB strongly supports the removal of this
requirement because it has been a significant source of confusion for
depositors and bank personnel.
While Alternative One addresses current problems associated with
defeating contingencies, the beneficiaries of a living trust still must
be qualifying beneficiaries in order to receive pass-through insurance
coverage. To qualify, a beneficiary must be a grantor’s spouse, child,
grandchild, parent, or sibling. For many trusts, the grantor, trustee,
and the beneficiary are the same person, thereby triggering the
individual or joint insurance category. ACB believes that there is still
confusion on this point and that further educational efforts would be
needed if Alternative One were to be adopted.
Under Alternative One, the FDIC would rely on a depository
institution’s deposit account records to identify living trust
beneficiaries, their interest in the trust, and possibly their
relationship to the grantor. Recording this level of detail would
substantially depart from current practice and would impose additional
recordkeeping requirements. Banks do not currently record such detailed
beneficiary information because it is not material to the bank.
Moreover, customers increasingly are using living trusts as a
testamentary substitute and do not want to disclose the particulars of
their estate plans to anyone, even their banker.
In addition to the challenge posed by obtaining beneficiary
information, living trusts are amendable and beneficiaries can be added
and deleted. As a result, we do not believe that the FDIC could
reasonably rely on an institution’s account records concerning a trust’s
beneficiaries, their trust interest, and their relationship to the
grantor.
In the event that institutions are required to retain detailed
beneficiary information, we would strongly encourage the FDIC to develop
a model form that would place the burden of recording accurate
beneficiary information on the grantor or the trustee. The grantor would
complete the form and certify its accuracy. Any such requirement should
only apply prospectively.
Simplified Regulations Should Not Result In Decreased Coverage
While Alternative One has flaws, we believe that it is preferable to
Alternative Two. While Alternative Two would be the easiest to
understand and would impose the least recordkeeping burden, we do not
believe that simplified deposit insurance regulations should come at the
expense of decreased deposit insurance coverage for revocable trusts
with more than one beneficiary. Furthermore, without per beneficiary
insurance coverage, depositors may take their funds out of insured
depository institutions and place them into investment accounts or other
financial mechanisms that would provide a greater return on their funds.
Informing Consumers
To inform consumers of any changes in the deposit insurance rules, we
suggest that the FDIC:
• Provide a revised deposit insurance brochure that banks may give to
customers opening a revocable trust account or customers who ask about
insurance coverage. If banks are required to obtain beneficiary
information, a brochure would allow institutions to show customers that
recording such information is required by the FDIC.
• Provide a contact information form with information the FDIC would
need to contact the grantor or trustee in the event of a bank failure.
• Update the EDIE web and software products to enable bank personnel
to estimate deposit insurance coverage for living trust accounts.
• Communicate any changes to attorneys, accountants, and financial
planners.
Conclusion
ACB appreciates the opportunity to comment on this important matter.
Should you have any questions or concerns, please contact the
undersigned.
_________________________________________________
America's Community Bankers represents the
nation's community banks. ACB members, whose aggregate assets total more
than $1 trillion, pursue progressive, entrepreneurial and
service-oriented strategies in providing financial services to benefit
their customers and communities.
68 Fed Reg. 38645 (June 30, 2003). A certificate of trust is a summary of a trust that contains
the name of the trust, the date, the grantor, trustees, and successor
trustees. It does not contain any information about the beneficiaries
or their interests. Many people use this as a way of showing that a
trust exists because it does not disclose the terms of the trust.
Sincerely,
Charlotte M. Bahin
Senior Vice President
Regulatory Affairs
America's Community Bankers
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