FDIC's Interim Rule for Living Trust Deposits

On September 26, 2008, the Federal Deposit Insurance Corporation issued interim final regulations entitled Deposit Insurance Regulations; Living Trust Accounts, as published in the Federal Register, and as announced in FDIC's Press Release, "FDIC Simplifies Coverage Rules for Revocable Trust Accounts" (09/26/08).

The interim rules amend 12 CFR 330, and were effective immediately, pending a further sixty day comment period before finalization.

This is a summary of the changed regulations:

The FDIC is adopting an interim rule to simplify and modernize its deposit insurance rules for revocable trust accounts.

The FDIC’s main goal in implementing these revisions is to make the rules easier to understand and apply, without decreasing coverage currently available for revocable trust account owners.

The FDIC believes that the interim rule will result in faster deposit insurance determinations after depository institution closings and will help improve public confidence in the banking system.

The interim rule eliminates the concept of qualifying beneficiaries. Also, for account owners with revocable trust accounts totaling no more than $500,000, coverage will be determined without regard to the beneficial interest of each beneficiary in the trust.

Under the new rules, a trust account owner with up to five different beneficiaries named in all his or her revocable trust accounts at one FDIC-insured institution will be insured up to $100,000 per beneficiary.

Revocable trust account owners with more than $500,000 and more than five different beneficiaries named in the trust(s) will be insured for the greater of either: $500,000 or the aggregate amount of all the beneficiaries’ interests in the trust(s), limited to $100,000 per beneficiary.

As recited in the published notice, the FDIC first attempted to clarify "living trust" coverage by an FDIC Advisory Opinion 94-32 (May 14, 1994), then by revision of 12 CFR 330.10(f) in 1998. Regulations proposed in June 2003, then adopted, after considering comments, as final regulations effective January 1, 2004, had included provisions regarding "living trust" coverage. The provisions were clarified in an Opinion Letter (12/17/03), and then in formal Advisory Opinion 94-32 (05/18/04).

The FDIC's prior rulemaking addressed a "living trust" as a depositor in a federally-insured financial institution due to the increasing use of such a legal device.

A living trust is a formal revocable trust over which the owner (also known as the grantor) retains ownership during his or her lifetime. Upon the owner's death, the trust generally becomes irrevocable.

A living trust is an increasingly popular instrument designed to achieve specific estate-planning goals. A living trust account is subject to the FDIC's insurance rules on revocable trust accounts. Section 330.10 of the FDIC's regulations (12 CFR 330.10) provides that revocable trust accounts are insured up to $100,000 per "qualifying'' beneficiary designated by the account owner.

If there are multiple owners of a living trust account, coverage is available separately for each owner.

Qualifying beneficiaries are defined as the owner's spouse, children, grandchildren, parents and siblings. 12 CFR 330.10 (a).

The most common type of revocable trust account is the "payable-on-death'' ("POD'') account, comprised simply of a signature card on which the owner designates the beneficiaries to whom the funds in the account will pass upon the owner's death.

The per-beneficiary coverage available on revocable trust accounts is separate from the insurance coverage afforded to any single-ownership accounts held by the owner or beneficiary at the same insured institution. * * *

Despite these efforts, application of the "qualifying beneficiary" requirement in the 2004 regulations still created confusion and complications for "living trust" deposit coverage.

Despite the FDIC’s efforts to simplify deposit insurance rules in recent years, there is still significant public and industry confusion about the insurance coverage of revocable trust accounts -- particularly living trust accounts, one of the two types of revocable trust accounts.

This continuing confusion about the insurance coverage of revocable trust accounts is evidenced by the tens of thousands of deposit insurance inquiries the FDIC has received following recent depository institution failures. * * *

In response, the FDIC's Board of Directors adopted these changes to simplify the rules for determining the coverage available on revocable trust accounts.

The interim rules, which are effective immediately, eliminate the concept of qualifying beneficiaries, so that coverage is based on the naming of virtually any beneficiary.

Under the revised rules, coverage for the vast majority of account owners generally is based on the number of beneficiaries named in a depositor's revocable trust account(s). The insurance limit will still be based on $100,000 per named beneficiary.

For revocable trust account owners with more than $500,000 in such accounts naming more than five beneficiaries, the coverage is the greater of either $500,000 or the sum of all the named beneficiaries' proportional interest in the trusts, limited to $100,000 per different beneficiary. * * *

This is the comment and the advice offered by the Chair of the FDIC to "living trust" depositors:

"We believe the interim rule will not only result in faster deposit insurance determinations after bank closings, but will help improve public confidence in the banking system," said FDIC Chairman Sheila C. Bair.

"We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records." * * *

Comments on the interim rule will be due no later than 60 days after its publication on September 26, 2008, in the Federal Register.

Already, on some legal listservs, practitioners are commenting on the interim rules, wondering about the effect on more complicated estate planning documents.

For example, on the listserv of the American College of Trust and Estate Counsel, Sebastian V. Grassi, Jr., Esq., of Grassi & Toering, PLC, in Troy, MI, provided some initial thoughts from a sophisticated estate planning attorney's viewpoint. I repost his comments (edited by me) with his permission:

Although the preamble to the new rules state that the FDIC is trying to align itself with 21st Century estate planning techniques, its new rules are geared to mom and pop "I love you" type revocable living trusts. These often provide a QTIP [Qualified Terminable Interest Property] interest for a surviving spouse, with remainder to children, per stirpes, with further provision (if any beneficiary has not attained a certain age) for a beneficiary's share to be held in trust until he/she attains the stated age. This is a common "simple" form of estate plan for a non-taxable estate.

In that type of trust you can ascertain the interests of the beneficiaries; and when the bank fails, you know exactly, at that moment in time, who the living beneficiaries are, ignoring the contingencies.

However, the new FDIC rules concerning revocable living trusts do not adequately deal with a sprinkle trust, such as a GST dynasty trust.

The rules attempt to clarify a situation concerning a surviving spouse's life estate with remainder over to the grantor's three children. But what if the surviving spouse was granted a testamentary limited power of appointment to any of the grantor's descendants, then what? How many remainder beneficiaries are there?

As I read the new rules, such a power would probably be treated as a contingency and therefore not be taken into consideration (i.e., the grantor's descendants would not be counted), and only the three children would be counted for the $100,000 per beneficiary limit (i.e., $300,000 of coverage - 3 kids x $100,000).

The new rules, in my opinion, generally require specifically named beneficiaries with ascertainable (i.e., statistically determinable interest, ignoring contingencies, such as the exercise of the testamentary limited power of appointment) in order to get the $100,000 FDIC coverage per beneficiary.

Thus, Sprinkle Trusts among the grantor's descendants, appear to provide only $100,000 of coverage, maximum, per trust share.

Now one way to deal with that is to have have the GST trust be divided into separate shares for the kids (a typical approach). In that case, it appears that each kid's trust share would get up to $100,000 of coverage. So, a pure credit shelter sprinkle trust (i.e., not divided among the children when the surviving spouse dies) would probably provide only $100,000 of FDIC coverage, whereas, if the trust divides per stirpes, greater coverage per trust (not per trust beneficiary since the trust is a sprinkle trust) would provide the most FDIC coverage.

The new rules took effect on September 26, 2008 for all existing and future revocable trust accounts, and for existing and future irrevocable trust accounts resulting from formal revocable trust accounts.

Update: 10/14/08:

On October 10, 2008, The International Herald Tribune published an article, entitled "FDIC approves $250,000 insurance limit" that reported a temporary increase in the FDIC coverage limits through the end of 2009:

The Federal Deposit Insurance Corp. on Friday formally approved the increased insurance limit of $250,000 per regular account that was part of the financial rescue legislation enacted last week.

The FDIC board approved the temporary increase per account in a vote at a meeting. The new limits, which extend through the end of next year, also provide for an increase in the insurance ceiling on joint deposit accounts to $200,000 per co-owner of the account from the current $100,000.

The limit for retirement accounts held in banks remains at $250,000. * * *

The "Frequently Asked Questions" on the FDIC website were updated, as follows:

What are the basic FDIC coverage limits?*

• Single Accounts (owned by one person): $250,000 per owner

• Joint Accounts (two or more persons): $250,000 per co-owner

• IRAs and other certain retirement accounts: $250,000 per owner

• Revocable trust accounts: Each owner is insured up to $250,000 for the interests of each beneficiary, subject to specific limitations and requirements

*These deposit insurance coverage limits refer to the total of all deposits that account holders have at each FDIC-insured bank. The listing above shows only the most common ownership categories that apply to individual and family deposits, and assumes that all FDIC requirements are met.

For further information about all recent changes to FDIC deposit insurance coverage through October 14, 2008, see: Changes in FDIC Deposit Insurance Coverage - September-October 2008 on the FDIC website.