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FDIC Considers New Rule on Living Trust Accounts Coverage

MAY 16, 2003


FDIC Considers New Rule on Living Trust Accounts Coverage

The FDIC is considering amending its deposit insurance regulations concerning the insurance coverage of living trust accounts. Currently, living trust accounts are treated like revocable trust accounts and are insured up to $100,000 per qualifying beneficiary. This insurance coverage is separate from the coverage of other accounts held by the owner or beneficiary at the same bank. However, because the FDIC often has to review these trusts at the time of a bank failure to see if there are any "defeating contingencies" in the trust agreement (i.e., conditions to the beneficiary receiving the trust assets) and because of widespread confusion among bankers and the public as to how these accounts are insured, the FDIC is considering insuring the accounts for up to $100,000 per grantor (i.e., the person who established the trust) and not per beneficiary. This insurance would be separate from the coverage of other ownership accounts the grantor may have at the same bank.

At an FDIC Board meeting last week to consider the proposed rule, the two outside directors, Comptroller John D. Hawke, Jr. and OTS Director James Gilleran, insisted the FDIC also seek comment on an alternative proposal that would grant $100,000 of coverage to each beneficiary of a living trust account regardless of whether the trust agreement contained any defeating contingencies. FDIC vice chairman John Reich cautioned that such a proposal would expand the amount of insured deposits and that he would want to see estimates of how this would affect the insurance fund reserve ratio before voting on it. Ultimately, the FDIC board decided to seek comment on both alternatives.

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