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4000 - Advisory Opinions
Whether a Deposit Trust Agreement Created an Irrevocable Trust for
Purposes of Section 330.10 of the FDIC's Insurance Regulations
FDIC--94--12
March 9, 1994
Alan J. Kaplan, Assistant General Counsel
This is in response to your letter of December 22, 1993 concerning
the deposit insurance coverage to be afforded to a certain fiduciary
account maintained at [BANK].
First, we would like to confirm your understanding of two technical
points raised in your letter. We agree that section 330.6(a) of the
FDIC's regulations, 12 C.F.R. § 330.6(a), does provide
"pass-through'' insurance coverage for funds held by an insured
depository institution in any fiduciary capacity (e.g., as agent,
custodian, nominee), other than as trustee of an irrevocable trust
(which is governed by section 330.10 of our regulations,
12
{{8-31-94 p.4841}}C.F.R. § 330.10). We also agree that
the requirements of section 330.11 of the FDIC's regulations, 12 C.F.R.
§ 330.11, only apply to irrevocable trusts where the trustee is not
an insured depository institution.
The only remaining issue is whether or not the recently revised
[DEPOSIT TRUST AGREEMENT] ("Revised Trust Agreement") creates
an irrevocable trust for purposes of section 330.10(a) of the FDIC's
deposit insurance regulations, 12 CFR § 330.10(a), such that each
[COMPANY] customer's interest in the account established pursuant to
the Revised Trust Agreement is insured separately from any other
accounts that the customer may maintain in the same insured depository
institution. You have provided us with a legal opinion by the law firm
of *** ("Legal Opinion") opining that the Revised Trust Agreement
creates an irrevocable trust under Connecticut law.
Section 311(b)(3) of the Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA") amended section 7(i) of the
Federal Deposit Insurance Act ("FDI Act"), 12 U.S.C. § 1817(i),
effective December 19, 1993, substantially reducing the extent of
deposit insurance coverage available for accounts held by an insured
depository institution in a fiduciary capacity. Under pre-existing FDIC
rules, when an insured depository institution held funds as an agent,
nominee, guardian, custodian, conservator, trustee or in any other
fiduciary capacity, those funds were insured in the amount of up to
$100,000 for the interest of each principal or beneficiary and that
insurance was separate from the insurance provided for any other
accounts maintained by the principals or beneficiaries at the same
insured institution. The FDICIA amendment still provides insurance
coverage for such accounts on a per beneficiary basis, but eliminated
the separate insurance coverage that was provided for the beneficiary's
interests. In other words, a principal's or beneficiary's interest in
such an account will now be aggregated with other accounts maintained
by that person at the same insured institution. However, section 7(i)
of the FDI Act and § 330.10(a) of the FDIC's regulations still
provide separate insurance coverage, in the amount of up to $100,000
per owner or beneficiary, whenever an insured institution is acting as
trustee under an irrevocable trust established pursuant to a statute or
written trust agreement. Neither the statute nor the FDIC's regulations
define the term "irrevocable trust."
[COMPANY'S DEPOSIT] system allows licensed [COMPANY] meter users
("Mailers/Settlors") to have their POSTAGE METERS RESET
electronically. In order to avail themselves of this service,
Mailers/Settlors must enter into a ("Rental Agreement") with
[COMPANY] and must advance funds for the payment of future postage.
These funds are then collected through a lock-box arrangement and
deposited with [BANK] as trustee, as mandated by the Revised Trust
Agreement, which was attached as Exhibit A to the Legal Opinion and
will be printed on page 2 of the Rental Agreement. [BANK] then
invests the deposits, primarily in certificates of deposit or savings
accounts at FDIC insured banks, pursuant to the terms of the Revised
Trust Agreement. (Revised Trust Agreement, numbered paragraph 5).
Each Rental Agreement between [COMPANY] and a Mailer/Settlor is
for an initial term of either one or three years or some number of
months. During the initial term, the Mailer/Settlor may not terminate
the Rental Agreement. (Rental Agreement, Terms and Conditions, numbered
paragraph 6). After the initial term, the Mailer/Settlor may terminate
the Rental Agreement upon 90 days written notice to [COMPANY].
(Rental Agreement, Terms and Conditions, numbered paragraph 6). The
Mailer/Settlor, upon terminating the Rental Agreement, may send a
written demand letter to [COMPANY] requesting a refund of any of its
funds remaining in the trust account, thus terminating its interest in
the trust. (Rental Agreement, Terms and Conditions, numbered paragraph
11).
The Revised Trust Agreement is between [COMPANY], as sponsor of
the [DEPOSIT] system, and [BANK], as trustee. The Rental Agreement
Mailers are referred to as the Settlors of the trust. The Revised Trust
Agreement incorporates each Mailer/Settlor "as if the Mailer were an
actual signatory of" the Revised Trust Agreement (Revised Trust
Agreement, numbered paragraph 1) and seeks to bind each Mailer/Settlor
to any alterations or amendments to the Revised Trust Agreement. (Id.)
While the Revised Trust Agreement
{{8-31-94 p.4842}}is signed only by [BANK] and
[COMPANY] each Mailer/Settlor who signs a Rental Agreement agrees to
be bound by all of the terms and conditions of the Revised Trust
Agreement. (Rental Agreement, Acceptance of Trust Agreement).
Deposits held by [BANK] can be transferred from the trust only
upon instructions from [COMPANY], for payment to the United States
Postal Service for postage used by a Mailer/Settlor or to a
Mailer/Settlor upon the termination of its Rental Agreement or for the
return of excess deposits. (Revised Trust Agreement, numbered paragraph
2). Pursuant to the Rental Agreement, the Mailer/Settlor has the right
to terminate the Rental Agreement upon 90 days written notice to
[COMPANY] at any time after the initial term. (Rental Agreement,
numbered paragraph 6). Upon termination of the Rental Agreement, the
Mailer/Settlor may instruct [COMPANY] to terminate its interest in
the trust account and refund any remaining funds. (Rental Agreement,
Terms and Conditions, numbered paragraph 11).
During our meeting of November 23, 1993, we indicated to you that it
would be helpful for the FDIC to have an opinion from local counsel
concerning the irrevocability/revocability of the Revised Trust
Agreement under Connecticut law. In the context of deposit insurance,
the FDIC looks to state law in helping us to determine the ownership of
deposits. See 12 CFR § 330.3(h). Nonetheless, the question
of what is an irrevocable trust, as that term is used in § 7(i) of
the FDI Act and § 330.10(a) of our regulations, is ultimately a
question of federal law.
We concur with the Legal Opinion to the extent that it opines the
trust to be irrevocable during the initial term and the ninety days
thereafter before which the Mailer/Settlor's written notice to
[COMPANY] would cause its interest in the trust to be terminated.
However, once the Mailer/Settlor has the ability to cause the trust to
be terminated as to its interests, we are of the opinion that the trust
is not irrevocable for purposes of § 330.10(a) of the FDIC's
regulations.
Our review of the Revised Trust Agreement, as compared to the
pre-existing 1979 trust agreement, indicates that the two agreements
are very similar. The primary difference appears to be that the Revised
Trust Agreement explicitly states in two places that the trust created
thereby is irrevocable. (Revised Trust Agreement, paragraph 1 &
numbered paragraph 9). It also explicitly provides that it may not be
terminated, revoked or modified by the Mailers. (Revised Trust
Agreement, numbered paragraph 9). The pre-existing trust agreement
contains no such language. The Revised Trust Agreement contains several
other revisions which are not relevant to your inquiry concerning
deposit insurance.
The Legal Opinion states that the Revised Trust Agreement's
declaration that the trust is irrevocable is evidence that such is the
case. We are not aware of, nor does the Legal Opinion cite, any
precedent which stands for the proposition that such a self-serving
statement is to be accorded any significant weight. The Legal Opinion
cites Scott on Trusts, § 329A, (4th ed. 1991) in support
of the proposition that a trust is irrevocable if the settlor cannot,
by an express or implied power, revoke or modify the substance of the
trust. The Legal Opinion goes on to state:
If the trust is evidenced by a written instrument, and there is
no provision in the instrument expressly or impliedly reserving to the
settlor a power to revoke the trust, the trust is irrevocable. The
Trust created by the Agreement meets this standard. The terms of the
Agreement do not reserve to the Mailer the ability to revoke the Trust.
Indeed, the Agreement states the contrary.
(Legal Opinion, p. 4). (Citation omitted). While the Legal Opinion
is correct that the Revised Trust Agreement explicitly states that
the Mailer/Settlor cannot amend, revoke or terminate the trust, it
fails to consider the fact that the Mailer/Settlor can instruct
[COMPANY] to effectively terminate its interest in the trust on
ninety days written notice after the expiration of the initial term
of the Rental Agreement. (Rental Agreement, numbered paragraph 6).
If the Mailer/Settlor instructs [COMPANY] to terminate its
interest in the trust, the balance of funds in the Mailer/Settlor's
trust account must be refunded within 45 days. (Rental Agreement,
numbered paragraph 11). Thus, at the
{{8-31-94 p.4843}}expiration of the initial term, the
Mailer/Settlor possess the power to effectuate the termination of its
interest in the trust. The use of the Rental Agreement as the vehicle
for allowing the Mailer/Settlor to instruct [COMPANY] to terminate
the trust appears merely to be a device which is being used to bolster
the legal argument that the trust is irrevocable.
However, later on in the Legal Opinion (page 6), the firm cites
Bogert, Trusts and Trustees, § 996 (2d ed. 1983) and
Scott on Trusts, § 329A (4th ed. 1191), for the
proposition that "a trust which cannot be revoked for a stated
period of time is irrevocable until the expiration of the stated
period." We agree. But, what the Legal Opinion does not say is that
if a trust is irrevocable for only a stated period of time, then it
would seem reasonable to conclude that it must be revocable subsequent
to that stated period to the extent it still exists (has not already
been revoked).
We have reviewed the cases cited in the Legal Opinion concerning
irrevocable trusts, Connecticut Bank & Trust Co. v. Hurlbutt,
157 Conn. 318 (1968) and Bauer v. Bauer, 490 P.2d. 1350
(Wash. App. 1971). In Hurlbutt, the Supreme Court of
Connecticut held that a settlor's letter to the trustee requesting an
amendment to an irrevocable inter vivos trust was ineffective because
the trust agreement provided that it could only be amended with regard
to the time and manner in which income and/or principal shall be paid
to the beneficiaries. The letter sought to change the beneficiaries. We
agree with the Legal Opinion that this case "underscores the
principle that a court will not allow a settlor to exercise powers over
the trust property to the extent that the exercise of those powers is
inconsistent with the express provisions of the agreement." (Legal
Opinion, p. 4). However, we fail to see how this case supports the
conclusion that the trust in this case is irrevocable after the
expiration of the initial term of the Rental Agreement.
In Bauer, the Court of Appeals of the State of Washington
held that a settlor who created an irrevocable trust pursuant to a
divorce decree for the benefit of his children could not modify the
trust so that the trust assets, which had unexpectedly increased in
value, would be returned to him when his children reached the age of
25. Once again, while we agree that this case supports the proposition
that a trust is irrevocable unless the settlor retains specific
authority to modify or revoke it, we are of the opinion that it is not
applicable to the instant case where the Mailer/Settlor can effectively
terminate its interest in the trust after the expiration of the initial
term of the Rental Agreement by so instructing [COMPANY] in
writing. 1
Based upon our conclusion that the trust is irrevocable up until the
point in time at which the Mailer/Settlor can effectuate the revocation
of their interest in it, it is our opinion that each Mailer/Settlor's
interest in an account established pursuant to the Revised Trust
Agreement would be insured separately from any other funds which the
Mailer/Settlor may have on deposit at the same insured depository
institution, up to a maximum of $100,000, for such period of time.
However, once the Mailer/Settlor has the ability to revoke the trust by
notifying [COMPANY] in writing, this separate deposit insurance would
cease. Of course, if the Mailer/Settlor were to renew the Rental
Agreement, and thus its interest in the trust, it would once again
receive the benefit of the separate insurance until it is once again
able to revoke the trust.
My opinion is based upon the facts as described above. Different
facts may warrant a different conclusion. This letter represents the
opinion of the Legal Division staff and, as such, is not binding on the
FDIC or its Board of Directors. If you have any questions concerning
this letter, please do not hesitate to contact me (202-898-3734), or
Mr. Claude A. Rollin (202-898-3985) or Mr. Jeffrey M. Kopchik
(202-898-3872) of my staff.
{{8-31-94 p.4844}}
1We also point out that this case was decided by a state court
in Washington, not Connecticut. Go Back to Text
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