CUNA Regulatory Comment Call
February 25, 2004
Share Insurance Expanded
(Not a Major Proposal)
- The NCUA Board has issued an interim final rule that requests comments on an amendment to the share insurance rules in order to maintain parity with a recent amendment to the FDIC deposit insurance rules.
- Specifically, the amendment will change the rules regarding coverage of beneficiary interests in living trusts by ending the provision that limits insurance coverage in which the interest of a qualifying beneficiary (spouse, child, grandchild, parent, or sibling of the grantor) is subject to a defeating contingency.
- Currently, if there is a defeating contingency, which is a condition that has to be fulfilled under the trust agreement before the beneficiary may receive funds on the owners death, separate insurance is not available for that beneficiary. With the amendment, separate insurance will be available up to the $100,000 limit.
- The final rule will be effective on April 1, 2004, although NCUA has requested comments, which are due to the agency by April 26, 2004. Please submit your comments to CUNA by April 7, 2004.
Please feel free to fax your responses to CUNA at 202-638-7052; e-mail them to Associate General Counsel Mary Dunn at firstname.lastname@example.org and to Assistant General Counsel Michelle Profit at email@example.com; or mail them to Mary and Michelle c/o CUNAs Regulatory Advocacy Department, 601 Pennsylvania Avenue, NW, South Building, Suite 600, Washington, D.C. 20004. You may also contact us at 800-356-9655, ext. 6733, if you would like a copy of the proposed rule, or you may access it here.
When a grantor establishes a share account with funds that are subject to a separate living trust agreement, share insurance coverage is provided in accordance with NCUAs rules that govern revocable trust accounts. The rules were designed to cover a straightforward payable on death account, sometimes simply referred to as a POD account, that provides for the payment of any balance remaining in an account on its owners death to specified beneficiaries. Evidence of the intent of the account owner to pass funds to one or more beneficiaries may be as simple as a designation in the account signature card such as POD.
By contrast, a living trust arrangement involves a separate, often complex trust document that may specify that an identified beneficiarys right to receive some portion of the account balance is dependent on certain conditions. If the interest of a qualifying beneficiary in an account established under the terms of a living trust agreement is contingent on fulfillment of a specified condition that condition is referred to as a defeating contingency. If an interest is subject to a defeating contingency, then separate insurance is not available for that qualifying beneficiary. For example, if an account owner names his son as a beneficiary but specifies that the son can only receive shares of the trust fund if he successfully completes college, then that is a defeating contingency. Another example is where the interest of one beneficiary is dependent on another beneficiarys surviving the grantor. In both cases, the current rules prevent separate insurance for the qualifying beneficiary because his or her interest is contingent.
In the interim rule, NCUA has revised the current living trust account rules to provide for insurance coverage of up to $100,000 per qualifying beneficiary who, as of the date of a credit unions failure, would become entitled to the living trust assets on the owners death. While this approach provides insurance coverage for qualifying beneficial interests irrespective of defeating contingencies, a beneficiarys trust interest that is dependent on the death of another trust beneficiary will still not qualify for separate insurance. If a beneficiarys interest is subordinate only to a life estate of another beneficiary, that interest will be insured. The amended rule allows for separate insurance for both the life estate and the remainder interest for qualified beneficiaries.
Two examples illustrate these principles. For example, an account established under a living trust provides that the trust assets go in equal shares to the grantors three children on the grantors death. The account would be eligible for $300,000 of deposit insurance coverage. The coverage would still be $300,000 even if the trust provides that the funds would go to the children only if each graduates from college before the owners death because defeating contingencies will no longer be relevant for deposit insurance purposes. Another example would be where a living trust provides that the owners spouse becomes the owner of the trust assets on the owners death but, if the spouse predeceases the owner, the three children then become the owners of the assets. In this case, if the spouse is alive when the credit union fails, the account will be insured up to a maximum of $100,000, because only the spouse is entitled to the assets on the owners death. If at the time of the credit union failure, however, the spouse had predeceased the owner, then the account would be eligible for up to $300,000 coverage because there would be three qualifying beneficiaries entitled to the trust assets on the owners death.
NCUA, consistent with the FDIC, has determined not to require a credit union to maintain records disclosing the names of living trust beneficiaries and their respective trust interests. NCUA found a requirement to keep those records to be unduly burdensome. The general principle governing share insurance coverage in NCUAs regulations, however, requires that the records of the credit union disclose the basis for any claim of separate insurance. This obligation may be met if the title of the account or another credit union record refers to a living trust. The final rule makes reference to this fact, but specifically disclaims any requirement that the credit unions records must identify beneficiaries or disclose the amount or nature of their interest in the account.
NCUA believes the final rule achieves two important objectives: simplifying the existing rule and providing consistency in how insurance coverage is determined for all types of revocable trust accounts. With the amendment, both living trust accounts and "payable on death" accounts will have insurance coverage calculated in the same fashion. In each case, coverage is based upon the interest of the beneficiaries who will receive the account funds when the owner dies, determined as of the date of the credit union's failure, regardless of any contingencies or conditions affecting those interests. In addition, the amendment will provide credit unions and their members with a better understanding of the share insurance coverage rules and will help to eliminate the present confusion surrounding the coverage of living trust accounts.
The amendment does not change the way in which non-qualifying beneficiaries are treated for share insurance purposes. As is the case with traditional revocable trust accounts, a beneficiary must be the spouse, child, grandchild, parent or sibling of the grantor in order to qualify for separate insurance coverage. The interest of any non-qualifying beneficiary will be added to any other single-ownership or individual funds of the grantor and insured to a maximum of $100,000.
Living trusts sometimes provide for a life estate interest for designated beneficiaries and a remainder interest for other beneficiaries. The final rule addresses this situation by deeming each life estate holder and each remainder beneficiary to have an equal interest in the trust assets and provides up to $l 00,000 coverage per qualifying beneficiary. For example, assume a grantor creates a living trust providing for a spouse to have a life estate interest in the trust assets with the remaining assets going to their two children upon the spouse's death. The assets in the trust are $300,000 and a living trust account is opened for that full amount. Unless otherwise indicated in the trust, the NCUA would deem each of the beneficiaries to own an equal share of the $300,000, and the full amount would be insured. This result would be the same even if the spouse has the power to invade the principal of the trust, because, under the amended rule, defeating contingencies are no longer relevant for insurance purposes.
Another example would be where the living trust provides for a life estate interest for the grantor's spouse and remainder interests for two nephews. As in the preceding example, each beneficiary would be deemed to have an equal ownership interest n the trust assets, unless there was an indication specifying different ownership interests. Here the life estate holder is a qualifying beneficiary, the grantor's spouse, but the remainder beneficiaries, the grantor's nephews, are not. As such, assuming an account balance of $300,000, the living trust account would be insured for at least $100,000 because the grantor's nephews would be insured as the grantor's single-ownership funds. If the grantor has no other single-ownership funds at the same credit union, then only $100,000 would be insured. Thus, the $300,000 in the living trust account would be insured for a total of $200,000 and $100,000 would be uninsured. The NCUA believes this is a simple, balanced approach to insuring living trust accounts where the living trust provides for one or more life estate interests and is also consistent with the FDIC's approach.
QUESTIONS REGARDING THE PROPOSAL
Eric Richard General Counsel (202) 508-6742 firstname.lastname@example.org |
Mary Mitchell Dunn SVP & Associate General Counsel (202) 508-6736 email@example.com
Jeffrey Bloch Assistant General Counsel (202) 508-6732 firstname.lastname@example.org
Catherine Orr Senior Regulatory Counsel (202) 508-6743 email@example.com