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4000 - Advisory Opinions
Insurance coverage of a joint revocable trust account.
FDIC--05--01
January 31, 2005
Joseph A. DiNuzzo, Counsel
This is in response to your e-mail inquiry about the
insurance coverage of a joint revocable trust account. It also serves
as a follow-up to my e-mail response to your question. As you have
explained, the trust is a revocable trust established by a husband and
wife. On the death of the first spouse, the trust is split into three
sub-trusts. The discussion below notes the particulars of the
sub-trusts.
When Both Settlors Are Alive
When both settlors are alive, the coverage would be up to $1.2
million. That is because there are two settlors and six qualifying
beneficiaries (four grandchildren and two children) as to each settlor.
The FDIC's revocable trust account rules provide coverage based on the
beneficiaries entitled to the trust assets upon the death of the
last settlor. 12 C.F.R.
330.10(f), as revised at 69 Fed. Reg. 2825, 2829
(Jan. 12, 2004). Here the six qualifying beneficiaries would be
entitled to the funds upon the death of the second settlor and the
maximum coverage would be $100,000 per settlor, per qualifying
beneficiary, yielding $1.2 million. Upon the death of the first settlor
the coverage would change.
When the First Settlor
Dies 1
Trust A
Upon the death of the first spouse Trust A is created. It is a
survivor's trust containing the surviving spouse's separate property
and one-half of the community property. The trust
{{6-30-06 p.4984.106}}remains revocable for the surviving
spouse's life and the surviving spouse has a general power of
appointment over the trust assets. On the surviving spouse's death,
the remaining balance is added to Trust B and distributed pursuant to
the terms of that trust. As described below, Trust B is an irrevocable
trust.
For deposit insurance purposes, the FDIC treats the owner of the
funds as the insured party. Here the surviving settlor is the sole
owner of the funds in the survivor's trust; thus, we would deem him or
her to be the sole settlor for insurance purposes. The beneficiaries of
Trust A, under the FDIC's rules governing revocable trusts, would be
the individuals entitled to the funds upon the death of the settlor.
See 12 C.F.R. § 330.10(f). Here the funds in Trust A--upon
the death of the settlor--would be transferred to Trust B and then
distributed to the six beneficiaries, who all are "qualifying
beneficiaries" under the FDIC's insurance rules. This means that
the Trust B beneficiaries are, in essence, the beneficiaries of the
survivor's trust. 2
As such, the funds in the survivor's trust would be insured up to
$100,000 per qualifying beneficiary, or $600,000.
Trust B
Also upon the death of the first settlor, Trust B is created. It is
an irrevocable trust holding the federal estate tax exclusion amount
(currently $1.5 million) and paying net income to the surviving spouse
for life. The trustee, who is the surviving spouse, may invade the
principal of the trust. On the death of the surviving spouse, the funds
in Trust B are distributed as follows: first, gifts of $100,000 will be
made to each of four grandchildren; then, the balance will be divided
equally among the settlors' two children (or their issue).
An account established in connection with Trust B would be insured
under the FDIC's irrevocable trust rules. Under those rules
the account would be insured up to $100,000 per beneficiary who has an
ascertainable, non-contingent interest in the trust
assets. 3
Trust B is an irrevocable trust established by two settlors:
the deceased spouse and the surviving spouse. In the case of an
irrevocable trust established by two settlors, the FDIC provides
separate insurance for the funds contributed by each settlor.
The methodology for determining the coverage for the funds in the
account established for Trust B would be to deem the funds to be
contributed in equal shares by the two settlors. Here we'll assume
that the trust is funded with $1.5 million and that each settlor
contributed one-half of that amount.
Funds Contributed by the Deceased Spouse. The surviving
spouse would be one of the beneficiaries of Trust B. Under the trust,
the surviving spouse would receive "a life estate interest." The
settlors' four grandchildren and two children would be the other
beneficiaries of Trust B. The surviving spouse's life estate interest
would be an ascertainable, non-contingent trust interest under the
FDIC's regulations because it could be calculated through the use of
the present value/life expectancy tables in the Internal Revenue Code.
See 12 C.F.R. § 330.1(l). The value of this
interest would depend upon two factors: (1) the balance of funds
($750,000); and (2) the age of the surviving spouse. We do not have the
information to determine the present value of the surviving spouse's
life estate interest in the trust assets but, assuming that amount is
less than $100,000, it would be fully insured. So, up to $100,000 of
the $750,000 contributed by the deceased settlor to fund Trust B would
be insured in connection with the life estate interest the surviving
spouse has in Trust B. The interests of the other Trust B
beneficiaries--the grandchildren and children--would not qualify as
non-contingent interests, because the surviving spouse has the
power
{{6-30-06 p.4984.107}}to invade the trust corpus.
As such, those interests would be insured to a combined limit of
$100,000.
The Funds Contributed by the Surviving Spouse. The funds
contributed by the surviving spouse also would be deemed to be
$750,000. The surviving spouse him- or herself would be one of the
beneficiaries of these funds. That person would receive interest in the
trust assets during the remainder of his or her life. The present value
of the surviving spouse's right to receive interest would be
ascertainable through the use of present value/life expectancy tables
in the Internal Revenue Code. See 12 C.F.R.
§ 330.1(l). These funds would not qualify as a "trust
interest" because the settlor and the beneficiary would be the same
person, i.e., the surviving spouse. In other words, the
settlor would retain an interest in this part of the trust
assets. See 12 C.F.R. § 330.1(p). Accordingly, this
portion of the funds would be insured to the surviving spouse in the
single ownership category. Assuming that this amount would be less than
$100,000 (and also assuming that the surviving spouse would not hold
any single ownership accounts at the bank), this portion of funds would
be fully insured.
As discussed in connection with the funds contributed by the
deceased settlor, the interests of the other Trust B beneficiaries--the
grandchildren and children--would not qualify as non-contingent
interests, because of the power-to-invade provision in the trust. As
such, those interests would be insured to a combined limit of $100,000,
relative to both the deceased spouse's and the surviving spouse's
contributions to Trust B.
Summary of Coverage for Trust B. The overall coverage
available under Trust B would be: up to $100,000 as to the deceased
spouse's contribution relative to the surviving spouse's life estate
interest in the trust; up to $100,000 as to the surviving spouse's
contribution relative to that person's life estate interest in the
trust, assuming he or she has no funds at the bank insured under the
single-ownership category; and up to $100,000 for the contingent
interest of the other beneficiaries of the trust. The overall coverage
of Trust B would be up to $300,000.
Trust C
Also upon the death of the first spouse, Trust C will be created if
the deceased spouse's separate property and 1/2 of the
community property exceed the applicable federal estate tax exclusion
amount. If created and funded, Trust C will be an irrevocable trust,
paying net income to the surviving spouse for life; the surviving
spouse will have the power to invade the trust. On the surviving
spouse's death, the remaining balance in Trust C would be added to
Trust B and distributed according to the terms of that trust.
As with the account established in connection with Trust B, an
account established in connection with Trust C would be insured under
the FDIC's irrevocable trust rules. Because the settlors and
beneficiaries of this irrevocable trust are the same as those in Trust
B, there would be no additional deposit insurance for this account. The
irrevocable trust rules provide coverage on a
per-settlor/per-beneficiary basis with a per-bank limit of $100,000
coverage for the total ascertainable, non-contingent interests a
settlor has provided per beneficiary. So, no additional deposit
insurance coverage would be provided for the trust interests created in
Trust C.
Summary of Coverage When the First Settlor Dies
For the reasons explained above, the funds in revocable Trust A
would be insured up to $600,000 and the funds in irrevocable Trusts B
and C would be insured to a maximum of $300,000.
When Both Settlors Have Died
As you have indicated, when both settlors have died, all the funds
will be in Trust B, an irrevocable trust. As such, insurance coverage
would be determined based on the FDIC's irrevocable trust rules. The
beneficiaries of Trust B are the settlors' four grandchildren and
their two children. Because the trust assets will no longer be subject
to a power to invade the trust corpus, all the interests would be
considered ascertainable and non-contingent. Thus, coverage would be
provided up to $100,000 for the interest of each beneficiary. The
maximum coverage would be $1.2 million, or $100,000 per settlor, per
beneficiary.
{{6-30-06 p.4984.108}}
Summary of Coverage During the Different Stages of the
Living Trust's Existence
When both settlors are alive, coverage could be up to $1.2 million.
When the first settlor dies, coverage could be up to $900,000. And,
when both settlors have died, coverage could be up to $1.2 million.
Please note that the FDIC's six-month rule would apply upon the
death of the settlors of the living trust account(s).
12 C.F.R. 330.3(j). So, for
example, upon the death of the first spouse, the living trust account
would continue to be insured as if both settlors were still alive for
six months after the date of that spouse's death. The same applies to
the insurance coverage of the accounts after the death of the second
spouse. They would continue to be insured as if the surviving spouse
were still alive for six months after that spouse's death. The account
owner(s) or trustee, however, may choose not to invoke the six-month
rule if doing so would reduce the coverage otherwise available on the
account(s).
I hope this is fully responsive to your questions. Feel free to call
me at (202) 898-7349 with any additional questions or
comments.
1 We are assuming that, following the death of the first
settlor, the trustee will establish a separate bank account for each
separate sub-trust. Go Back to Text
2 The treatment for a POD account naming a trust as a
beneficiary is different. There the FDIC considers the trust to be a
non-qualifying beneficiary; hence, for deposit insurance
purposes, the funds attributable to the trust are deemed to be the
owner's single-ownership funds. For POD accounts, the FDIC's deposit
insurance review is limited to the beneficiaries named in the
depository institution's deposit account records. Go Back to Text
3 The insurance coverage of irrevocable trust accounts is
governed by 12 C.F.R. § 330.13. Under that section of the FDIC's
regulations, funds representing a "non-contingent trust interest"
of a particular beneficiary are insured up to $100,000. See
12 C.F.R. § 330.13(a).
To the extent that beneficiaries' interests do not satisfy this
definition of "non-contingent trust interest," then the funds
representing all such contingent interests are added together and
insured up to $100,000. See 12 C.F.R. § 330.13(b).
Finally, to the extent that a settlor has retained an interest in any
funds, such funds are insured to the settlor up to $100,000 in the
single ownership category. See
12 C.F.R. § 330.1(p)
("Trust interest means the interest of a beneficiary in
an irrevocable express trust . . . but does not include any
interest retained by the settlor"). Go Back to Text
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