[Federal Register Volume 69, Number 38 (Thursday, February 26, 2004)]
[Rules and Regulations]
[Pages 8798-8801]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-4217]
=======================================================================
-----------------------------------------------------------------------
NATIONAL CREDIT UNION ADMINISTRATION
12 CFR Part 745
Share Insurance; Living Trust Accounts
AGENCY: National Credit Union Administration (NCUA).
ACTION: Interim final rule with request for comments.
-----------------------------------------------------------------------
SUMMARY: NCUA is amending its share insurance rules to simplify them
and maintain parity with the deposit insurance rules of the Federal
Deposit Insurance Corporation (FDIC). Specifically, the amendment
changes the existing rules concerning coverage for beneficial interests
in living trust accounts. The rules are amended by eliminating the
provisions that would limit insurance coverage where the interest of
the beneficiary is subject to a defeating contingency in a living trust
agreement. With the amendment, share insurance coverage of up to
$100,000 is provided per qualifying beneficiary who, as of the date of
an insured credit union's failure, would become the owner of assets in
the living trust upon the account owner's death. The FDIC recently
amended its deposit insurance rules by making a similar change. This
amendment is adopted as an interim rule to provide parity between NCUA
and FDIC insurance regulations and aid the public and prevent confusion
over the amount of Federal account insurance available on those
accounts.
DATES: This final rule is effective on April 1, 2004. Comments must be
received on or before April 26, 2004.
ADDRESSES: Direct comments to Becky Baker, Secretary of the Board. Mail
or hand-deliver comments to: National Credit Union Administration, 1775
Duke Street, Alexandria, Virginia 22314-3428. You are encouraged to fax
comments to (703) 518-6319 or e-mail comments to [email protected]
instead of mailing or hand-delivering them. Whatever method you choose,
please send comments by one method only.
FOR FURTHER INFORMATION CONTACT: Ross Kendall, Staff Attorney, Office
of General Counsel, at the above address or telephone: (703) 518-6562.
SUPPLEMENTARY INFORMATION:
A. Background
Living trusts have become an increasingly popular way for
individuals to transfer assets outside of probate while retaining
control of the funds during their lifetime. Where 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
NCUA's rules that govern revocable trust accounts. 12 CFR 745.4. The
NCUA believes, based on its experience and upon the experience of the
FDIC, that many persons who have established living trust accounts do
not understand the impact under the current rules of a defeating
contingency on the availability of separate insurance
[[Page 8799]]
coverage for beneficial interests in the account, even for ``qualifying
beneficiaries'' (the spouse, child, grandchild, parent or sibling of
the grantor).
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
upon its owner's 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
beneficiary's right to receive some portion of the account balance is
dependent upon certain conditions.
Currently, if the interest of a qualifying beneficiary in an
account established under the terms of a living trust agreement is
contingent upon fulfillment of a specified condition, referred to as a
defeating contingency, separate insurance is not available for that
beneficial interest. Instead, the beneficial interest would be added to
any individual account(s) of the grantor and insured to a maximum of
$100,000. Because the coverage for these types of accounts is under the
same rules that govern a simple ``payable on death'' account, members
and credit unions sometimes mistakenly believe that interests in living
trusts are automatically insured up to $100,000 per qualifying
beneficiary.
An example of a defeating contingency is where an account owner
names his son as a beneficiary but specifies in the living trust
document that his son's ability to receive any share of the trust funds
is dependent upon him successfully completing college. Another common
example is where a grantor's will provides that funds in the living
trust account can be used to satisfy a legacy made in the will. A third
example is where the interest of one beneficiary is dependent upon
another beneficiary's surviving the grantor. In each case, the current
rule operates to prevent separate insurance coverage, even for a
qualifying beneficiary, because his or her interest is contingent.
Even though the existing rules contain a definition of a defeating
contingency and an explanation of how such a contingency can defeat
separate insurance coverage, our experience, consistent with that of
the FDIC, is that the operation of the rule is not widely understood.
NCUA recognizes that the rules governing the insurance of living trust
accounts are complex and confusing. The FDIC reports that it has had to
deny separate insurance coverage for some beneficiaries of living
trusts in cases where it was clear that the grantor was not aware of
the impact of language in the trust agreement. NCUA staff have reviewed
recent examples of trust agreements that appear to have inadvertently
created defeating contingencies that would thwart separate insurance
for otherwise qualifying beneficiaries. In addition, the current rules
may require a detailed review of the trust documents to determine if a
defeating contingency exists. This effort is both difficult and time
consuming.
B. Parity With FDIC Deposit Insurance Rules
The changes will minimize confusion about the application of NCUA's
insurance rules to these types of accounts and maintain parity with
FDIC insurance on similar accounts at banks and savings associations.
The policy of the NCUA Board is to maintain parity with the FDIC, since
the account insurance funds administered by both agencies are backed by
the full faith and credit of the Federal Government. NCUA believes it
important that members of the public who use living trust accounts for
the future transfer of ownership of family assets without loss of
control during the owner's life receive the same protection, whether
the accounts are maintained at credit unions or other federally insured
institutions.
C. 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 union's failure, would become entitled
to the living trust assets upon the owner's death. While this approach
provides insurance coverage for qualifying beneficial interests
irrespective of defeating contingencies, a beneficiary's trust interest
that is dependent upon the death of another trust beneficiary will
still not qualify for separate insurance. If a beneficiary's 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.
An example that illustrates the basic rule is where an account
established under a living trust provides that the trust assets go in
equal shares to the grantor's three children upon the grantor's death.
This 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 owner's death because defeating contingencies
will no longer be relevant for deposit insurance purposes.
Another example would be where a living trust provides that the
owner's spouse becomes the owner of the trust assets upon the owner's
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
upon the owner's 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 upon the owner's
death.
Consistent with the FDIC's position, the NCUA has also determined
not to require a credit union to maintain records disclosing the names
of living trust beneficiaries and their respective trust interests. The
FDIC solicited comment specifically on this matter and concluded that
to do so would be unnecessary and burdensome. The NCUA Board concurs
with that judgment, recognizing that a grantor may elect to change the
beneficiaries or their interests at any time before his or her death
and that requiring a credit union to maintain a current record of this
information is impractical and unnecessarily burdensome. The general
principles governing share insurance coverage in NCUA's regulations,
however, require that the records of the credit union disclose the
basis for any claim of separate insurance. 12 CFR 745.2(c). This
obligation may be met if the title of the account or other credit union
records refer to a living trust. The final rule makes reference to this
fact, but specifically disclaims any requirement that the credit
union's 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
[[Page 8800]]
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.
Non-qualifying beneficiaries
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.
Life estate and remainder interests
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 $100,000 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 in the trust assets, unless
there were 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
spouse is a qualifying beneficiary. The $200,000 attributable to 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.
Appendix
The interim rule makes a corresponding change to Example 4, under
part B of the appendix to part 745, to reflect this amendment. It
removes language that had been in that example discussing the need to
determine whether a defeating contingency adds an example to illustrate
the operation of the rule in cases involving a life estate and
remainder interests.
D. Request for Comments
The Administrative Procedure Act requires that an agency must
provide an opportunity for public comment before issuing a final rule
unless it finds for ``good cause'' that public comment is
impracticable, unnecessary, or contrary to the public interest. 5
U.S.C. 553(b)(B). The NCUA Board has determined that public comment is
unnecessary and contrary to the public interest because: The rule
preserves parity with recently amended account insurance rules
administered by the FDIC, 69 FR 2825 (January 21, 2004); the rule
benefits credit union members and employees by simplifying how to
determine the amount of coverage available on a commonly used account;
it increases the amount of coverage that is available for the benefit
of credit union members; and it does not prejudice credit union members
or credit unions or require changes to current practices. Nevertheless,
this is an interim final rule, and the Board will accept comments for a
period of 60 days following the date of publication in the Federal
Register. All comments will be considered and the rule may be changed
in light of the comments received.
E. Effective Date
To avoid confusion and preserve parity with the FDIC, this interim
rule will become effective on April 1, 2004, the beginning of the next
calendar quarter following publication in the Federal Register.
Consistent with the FDIC's approach, the rule will apply as of that
date to all living trust accounts unless, upon the failure of an
insured credit union, a member who established a living trust account
prior to April 1, 2004, elects coverage under the previous living trust
account rules. If a credit union fails between the date of publication
in the Federal Register and April 1, 2004, NCUA will apply the final
rule if doing so will result in greater coverage for a living trust
account.
Regulatory Procedures
Regulatory Flexibility Act
The Regulatory Flexibility Act requires NCUA to prepare an analysis
to describe any significant economic impact a proposed rule may have on
a substantial number of small credit unions, defined as those under ten
million dollars in assets. This rule only clarifies the share insurance
coverage available to credit union members, without imposing any
regulatory burden. The final amendments would not have a significant
economic impact on a substantial number of small credit unions, and,
therefore, a regulatory flexibility analysis is not required.
Paperwork Reduction Act
NCUA has determined that the final rule would not increase
paperwork requirements under the Paperwork Reduction Act of 1995 and
regulations of the Office of Management and Budget.
Executive Order 13132
Executive Order 13132 encourages independent regulatory agencies to
consider the impact of their actions on state and local interests. In
adherence to fundamental federalism principles, NCUA, an independent
regulatory agency as defined in 44 U.S.C. 3502(5), voluntarily complies
with the executive order. The final rule would not have substantial
direct effects on the States, on the connection between the national
government and the States, or on the distribution of power and
responsibilities among the various levels of government. NCUA has
determined that this rule does not constitute a policy that has
federalism implications for purposes of the executive order.
[[Page 8801]]
The Treasury and General Government Appropriations Act, 1999--
Assessment of Federal Regulations and Policies on Families
The NCUA has determined that this final rule would not affect
family well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Pub. L. 105-277, 112 Stat.
2681 (1998).
Small Business Regulatory Enforcement Fairness Act
The Small Business Regulatory Enforcement Fairness Act of 1996
(Pub. L. 104-121) provides generally for congressional review of agency
rules. A reporting requirement is triggered in instances where NCUA
issues a final rule as defined by section 551 of the Administrative
Procedure Act. 5 U.S.C. 551. NCUA has obtained the determination of the
Office of Management and Budget that this rule is not a major rule for
purposes of the Small Business Regulatory Enforcement Fairness Act of
1996.
List of Subjects in 12 CFR Part 745
Credit unions, Share insurance.
By the National Credit Union Administration Board on February
19, 2004.
Becky Baker,
Secretary of the Board.
0
Accordingly, NCUA amends 12 CFR Part 745 as follows:
PART 745--SHARE INSURANCE AND APPENDIX
0
1. The authority citation for part 745 continues to read as follows:
Authority: 12 U.S.C. 1752(5), 1757, 1765, 1766, 1781, 1782,
1787, 1789.
0
2. Section 745.4 is amended by revising paragraph (e) to read as
follows:
Sec. 745.4 Revocable trust accounts.
* * * * *
(e) Living Trusts. Insurance treatment under this section also
applies to revocable trust accounts held in connection with a so-called
``living trust,'' meaning a formal trust that an owner creates and
retains control over during his or her lifetime. If a named beneficiary
in a living trust is a qualifying beneficiary under this section, then
the share account held in connection with the living trust may be
eligible for share insurance under this section, assuming compliance
with all the provisions of this part. This coverage applies only if, at
the time an insured credit union fails, a qualifying beneficiary would
be entitled to his or her interest in the trust assets upon the
grantor's death and that ownership interest would not depend upon the
death of another beneficiary. If there is more than one grantor, the
beneficiary's entitlement to the trust assets must be upon the death of
the last grantor. The coverage provided in this paragraph (e) is
irrespective of any other conditions in the trust that might prevent a
beneficiary from acquiring an interest in the share account upon the
account owner's death. The rules in paragraph (c) of this section on
the interests of non-qualifying beneficiaries apply to living trust
accounts. For living trust accounts that provide for a life estate
interest for designated beneficiaries and a remainder interest for
other beneficiaries, unless otherwise indicated in the trust, each life
estate holder and each remainder-man will be deemed to have equal
interests in the trust assets for share insurance purposes. Coverage
will then be provided under the rules in this paragraph (e) up to
$100,000 per qualifying beneficiary. For a living trust account to
qualify for coverage provided under this paragraph (e), the records of
the credit union must reflect that the funds in the account are held
pursuant to a formal revocable trust, but the credit union's records
need not indicate the names of the beneficiaries of the living trust or
their ownership interests in the trust. Effective April 1, 2004, this
paragraph (e) will apply to all living trust accounts, unless, upon an
insured credit union failure, a member who established a living trust
before April 1, 2004, chooses coverage under the previous living trust
account rules. For any insured credit union failures occurring between
February 19, 2004 and April 1, 2004, the NCUA will apply the living
trust account rules in this revised paragraph (e) if doing so would
benefit living trust account holders of such insured credit union.
* * * * *
0
3. The appendix to part 745 is amended by revising Example 4 and adding
new Example 5 under section B to read as follows:
Appendix to Part 745-Examples of Insurance Coverage Afforded Accounts
in Credit Unions Insured by the National Credit Union Share Insurance
Fund
* * * * *
B. How Are Revocable Trust Accounts Insured?
* * * * *
Example 4
Question: Member H invests $200,000 in a revocable trust account
held in connection with a living trust with his son, S, and his
daughter, D, as named beneficiaries. What is the insurance coverage?
Answer: Since S and D are children of H, the owner of the
account, the funds would normally be insured under the rules
governing revocable trust accounts up to $100,000 as to each
beneficiary, (Sec. 745.4(b)). However, because this account is held
in connection with a living trust whose named beneficiaries are
qualifying beneficiaries under Sec. 745.4, it must be scrutinized
to determine whether the account complies with all other provisions
of this part. Assuming that the account complies with all other
requirements of this part, then it will be treated as any other
revocable trust. In this instance, it will be insured up to $100,000
as to each beneficiary (Sec. 745.4(e)). Assuming that S and D have
equal beneficial interests ($100,000 each), H is fully insured for
this account.
Example 5
Question: H creates a living trust providing for his wife to
have a life estate interest in the trust assets with the remaining
assets going to their two children upon the wife's death. The assets
in the trust are $300,000 and a living trust share account is opened
for that full amount. What is the coverage amount?
Answer: Unless otherwise indicated in the trust, each
beneficiary (all of whom here are qualifying beneficiaries) would be
deemed to own an equal share of the $300,000; hence, the full amount
would be insured. This result would be the same even if the wife has
the power to invade the principal of the trust, inasmuch as
defeating contingencies are not relevant for insurance purposes.
* * * * *
[FR Doc. 04-4217 Filed 2-25-04; 8:45 am]
BILLING CODE 7535-01-P