FDIC Seeks Living Trust Account Insurance Rule Clarity

Of DOW JONES NEWSWIRES

WASHINGTON -- The Federal Deposit Insurance Corp. proposed two alternatives for clarifying its rules on the insurance coverage of living trust accounts, saying current regulations are the source of much confusion.

In a notice of proposed rulemaking published Monday, the FDIC cited "significant public and industry confusion about the insurance of coverage of living trust accounts." It also said it found a disproportionately high percentage of uninsured living trust deposits at recently failed depository institutions.

"The FDIC receives numerous calls daily from bankers, members of the public and industry representatives indicating their misunderstanding of the coverage for living trust accounts," the agency said, terming this confusion "understandable."

The FDIC proposed two alternatives for clearing up the current confusion: Providing living trust coverage of $100,000 per qualifying beneficiary regardless of so-called defeating contingencies; and providing coverage of $100,000 per grantor of a living trust.

A living trust is a formal revocable trust created by an owner (also known as a grantor) over which the owner retains control during his or her lifetime. Upon the owner's death, the trust generally becomes irrevocable. A living trust is an increasingly popular probate instrument designed to achieve specific estate and tax planning goals, the FDIC observed, saying these accounts are subject to its insurance rules on revocable trust accounts.

The most common form of a revocable trust account is the so-called POD (payable on death) 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. "Time has shown that the basic rules on the coverage of POD accounts are not adaptable to living trust accounts," the FDIC said.

"The POD rules were written to apply to signature-card accounts, not lengthy detailed trust documents," the agency said. "Because living trust accounts and PODs are subject to the same rules and analysis, depositors often mistakenly believe that living trust accounts are automatically insured up to $100,000 per qualifying beneficiary without regard to any terms in the trust that might prevent the beneficiary from receiving the funds. Our experience indicates that in a significant number of cases that is not so.

"Because of the existence of defeating contingencies (conditions that create the possibility that the beneficiary may never receive the funds following the owner's death) in the trust agreement, a living trust account often fails to satisfy the requirements for per beneficiary coverage," the FDIC continued.

"Thus, the funds in the account are treated as the owner's single-ownership funds and, after being added to any other single-ownership funds the owner has at the same institution, insured to a limit of $100,000," the FDIC went on. "The funds in a non-qualifying living trust account with more than one owner are deemed the single-ownership funds of each owner, with the corresponding attribution of the funds to each owner's single ownership accounts."

Saying current rules governing the insurance of living trust accounts are "too complex and confusing," the FDIC proposed two alternatives.

"The first alternative for simplifying and clarifying the insurance rules for living trust accounts would be to provide coverage up to $100,000 per qualifying beneficiary named in the living trust, irrespective of defeating contingencies," agency said.

"The second alternative to address the confusion surrounding the insurance coverage of living trust accounts is, in essence, to create a separate category over coverage for living trust accounts and insurance such accounts up to $100,000 per owner of the account," the FDIC said.

This likely would result in reduced coverage of trust account owners with living trusts naming more than one qualifying beneficiary, the FDIC said. It proposed a six-month "grace period" after the effective date of the proposed rule to mitigate the potential effect of decreasing coverage for some depositors.

The FDIC requested comments on the alternatives by Aug. 29, asking interested parties in particular to indicate which alternative they prefer. "If you suggest another alternative, please provide the details of that suggestion," the agency said.

-By John Connor, Dow Jones Newswires; 202-862-9273; John.Connor@dowjones.com

Updated June 30, 2003 12:12 p.m.