When a customer wishes to either transfer an existing account in the name of a living trust account or to initially set up a living trust account, the bank should obtain certain documentation about the terms of the trust. Traditional wisdom favored asking for only the first and last pages of the trust instrument. The reasoning was that the bank should have as little information as possible regarding the trust in its files so that it could not be deemed to be “on notice” of restrictions or limitations on the powers of the trustee or the scope of the trust.
In reality, the bank may expose itself to greater liability through ignorance of the trust’s provisions than it does through knowledge of them. Consider a scenario where a trustee presents a document, which purports to be a Revocation of Trust. If the bank’s documentation does not reflect whether or not the trust is revocable, the bank is faced with a dilemma. Should it honor the revocation? Think about a situation where a person claiming to be a successor trustee attempts to transact business on the trust account. Without documentation of the requirements for qualification of the successor trustee how can the bank determine if the individual is empowered to access the account?
I. PURPOSE OF DOCUMENTATION
The purpose of obtaining appropriate documentation is to:
A. enable the bank to handle the account appropriately;
B. determine the proper Taxpayer Identification Number (TIN) on the account;
C. equip the bank to accommodate future events, such as revocation or amendment of the trust instrument or qualification of successor trustees;
D. ensure proper transfer of titled assets into the trust;
E. allow the bank to accommodate borrowing requests; and
F. ensure the bank’s records reflect any circumstances which would give rise to additional FDIC coverage.
II. INFORMATION REQUIRED
The information the bank needs may be garnered from a copy of the trust instrument provided by the customer, a Certification of Trust or a signed and notarized Memorandum of Trust, that sets forth all the salient facts. After obtaining the necessary documentation, the bank should utilize a checklist similar to the one below to gain a firm grasp of the trust’s relevant features.
· Who is the grantor?
· Is the trust revocable? If so, by whom?
· May the trust be amended? If so, by whom?
· Who is the trustee?
· What powers is the trustee given?
· Are there co-trustees? If so, does the trust agreement specify that they may act independently?
· Are successor trustees named?
· Under what conditions do the successor trustees qualify to act? What documentation will the bank receive?
· What property is covered by the trust? Do you have a signed, written request authorizing transfer of any accounts into the name of the trust?
· Who are the beneficiaries?
· Under what conditions do the beneficiaries receive their interest in the funds or property?
· Is there a provision in the trust which allows the trustee to name authorized signers?
· Does the trust instrument grant the trustee the authority to borrow money on the behalf of the trust and/or pledge trust property as collateral?
With the necessary information, the customer’s trust may be properly accommodated and the bank will be able to protect itself from risk of liability. An explanation of why each informational item is needed may be helpful.
III. GRANTOR IDENTITY
The bank must know who the grantor is in order to advise the customer about the FDIC coverage, and in connection with certain other information, determine whether the grantor’s social security number may be used on the account.
IV. REVOCABILITY AND AMENDMENT
There are several reasons for knowing whether the trust may be revoked or amended and who may take those actions. The first reason relates to determination of the proper TIN to be used in connection with the account. The second reason is to aid in determining FDIC insurance coverage. Additionally, if the bank is presented a Notice of Revocation or a written amendment to the trust, it will need to refer to the trust provisions on revocation or amendment to ascertain whether those documents should be honored.
V. TRUSTEE INFORMATION
The trustee is the person who will be empowered to transact business on behalf of the trust. The bank must obtain the trustee’s signature on the signature card and deposit account agreement. If there are limitations on the power of the trustee to transact business with respect to trust properly held by the bank, the bank needs to be advised of the limitations. If there are co-trustees, they must act jointly unless (a) the trust agreement specifies that they may act independently; (b) if a vacancy occurs in the co-trusteeship; (c) if a co-trustee is unavailable to perform duties because of absence, illness, disqualification under other law, or other temporary incapacity; or (d) the co-trustee has properly delegated the performance of a function to another trustee. The bank will want to scrutinize the trust document for language authorizing co-trustees to act independently.
Internal Revenue Service regulations recognize a special type of trust termed “grantor trusts.” Under a “grantor trust” the grantor’s social security number is used as the TIN and payees report income as if paid to the grantor and not the trust. If the trust has the same individual as both the grantor and trustee (or co-trustee) and that individual is treated as owner for the taxable year of all the assets of the trust, the individual’s social security number would be the proper TIN on the account.
Where a trust has a husband and wife as the sole grantors and one spouse is either the trustee or co-trustee with a third party or both spouses are trustees or co-trustees with a third party and one or both of the spouses are treated as owners of all the assets of the trust for the taxable year, the social security number of either spouse may be used as the TIN on the account.
The first half of the two-part test for “grantor trusts” is satisfied when the grantor also serves as trustee or co-trustee. The second half of the test requires the grantor to be treated as owner for the taxable year of all the assets of the trust. A grantor is treated as owner of the assets of the trust during a taxable year if, at all times during that taxable year, the power to re-vest in the grantor title to such portion is exercisable by the grantor or a non-adverse party, or both.
Therefore, the analysis for determining whether the customer’s social security number may be used as the TIN on the account is as follows:
1. Is the trust revocable by the grantor or a non-adverse party? (The right to revoke equals the power to re-vest title.) If the answer is “yes”, go to question #2
2. Is the grantor also the trustee or co-trustee? (Or, if a husband and wife are the sole grantors, is one of them the trustee or co-trustee?)
If the answer to either question is “no”, the trust would not meet the definition of “grantor trust” and a separate TIN would be required for the trust.
Keep in mind that a trust, which initially meets the definition of “grantor trust”, may undergo a change in circumstances, which would disqualify it from treatment as a grantor trust. For example, if John Doe establishes the John Doe Revocable Living Trust, reserves to himself the power to revoke or amend, and names himself as trustee, upon Doe’s death the trust would become irrevocable. At that time it would cease to meet the criteria for a grantor trust and a separate TIN must be obtained. Similarly, if the trust becomes irrevocable due to the occurrence of an event specified in the trust instrument, the trust would need a trust TIN.
VII. TRUSTEE POWERS
If the trust instrument places limitations on the powers of the trustee’s ability to transact banking business (such as restrictions on borrowing or writing checks) the bank should take note.
VIII. QUALIFICATION OF SUCCESSOR TRUSTEES
Normally, successor trustees come into power upon the incompetency or death of the original trustee. However, the trust instrument itself establishes the conditions under which successor trustees qualify to act. The bank should study the relevant provisions of the trust document in order to determine what criteria must be met and what documentation the bank will receive. As an example, some trusts provide that the successor trustee will take over when a doctor has certified in writing that the original trustee is incompetent. In the event of death of the original trustee, the trust may require the successor to produce a copy of the death certificate. The provisions of the trust relating to qualification of successor trustees should be strictly observed.
IX. TRUST PROPERTY
There are two kinds of property that may be owned by a trust:
A. untitled assets; and
B. titled assets.
“Untitled assets” would include clothing, furniture, jewelry, books and other miscellaneous items. The category of “titled assets” embraces real estate, bank accounts, stocks, savings bonds, safe deposit boxes and any other property that is registered or titled in a specific name. Untitled assets may be transferred into a trust by a bill of sale or by virtue of, descriptive language in the trust instrument or an appendix or exhibit attached to the trust indicating the intent of the grantor that those assets be treated as trust property.
A transfer of titled assets into a trust may only be accomplished by transferring title into the name of the trust. If title is not transferred, the trust does not have ownership. The bank should obtain documentation for its files, if at all possible, of the intent of the owner to transfer title to a trust. Documentation may be in the form of a letter of instruction, signed and dated by the current owner of the property. Caution should be exercised when present ownership is held by multiple parties to be sure that all have authorized the transfer.
X. BENEFICIARY INFORMATION
Knowing who the beneficiaries are, their relationship to the grantor, and the conditions under which they receive their interest will enable the bank to determine:
• Whether the trust may maintain a NOW account; and
• Whether separate per beneficiary coverage is available from the FDIC on the account.
XI. NOW ACCOUNT ELIGIBILITY
With respect to NOW account eligibility, funds held in a fiduciary capacity may be held in a NOW account if all the beneficiaries are entitled or individuals who would be directly qualified to have NOW accounts. NOW accounts may be maintained by:
A. individuals;
B. funds held under various agency type agreements;
C. nonprofit organizations;
D. governmental units; and
E. funds held a fiduciary capacity where all the beneficiaries are the above described entities or individuals.
A bank may not allow a trust to hold a NOW account unless it has determined that all the beneficiaries of the trust meet this test.
XII. FDIC COVERAGE
A. In some instances, a living trust account may be insured by the FDIC on a “per beneficiary” basis, but this is not always the case. A thorough understanding of the complex regulation of insurance coverage of revocable trust accounts is necessary for new accounts representatives and customer services officers to ensure customers are given proper information.
The regulation on insurance coverage of revocable trust accounts provides, in pertinent part, that funds owned by an individual and deposited into a revocable trust account evidencing an intention that upon the death of the owner the funds shall belong to an eligible beneficiary shall be insured. The owner and beneficiary no longer must meet the kinship requirement that each beneficiary must be related to the owner from one of the following groups: parents, sibling, spouse, child, or grandchild.
The beneficiary must be an “eligible beneficiary” as defined below:
1. A natural person “living”;
NOTE: Pets, deceased persons or the naming of an object or entity that does not meet the eligibility requirements are not allowed as a beneficiary. Any beneficiary that is not legally entitled to receive funds upon the owner’s death will be ignored.
B. Revocable trust coverage depends on the number of eligible beneficiaries and the total deposit(s) allocated to all beneficiaries.
1. Five or fewer eligible beneficiaries and total deposit $1,250,000 or less, than insurance coverage is:
• Up to $250,000 times the number of unique eligible beneficiaries named by the owner. This applies to the combined interests for all beneficiaries the owner has named in all (both informal and formal) revocable trust deposits established in each bank.
• The result is the same as above even if the owner has allocated different or unequal percentages or amounts to multiple beneficiaries. Therefore, in order to calculate the deposit insurance coverage, multiply $250,000 times the number of owners times the number of unique eligible beneficiaries.
2. The owner names six or more unique eligible beneficiaries and the deposit is greater than $1,250,000.
• If the owner is attempting to insure more than $1,250,000 with six or more unique eligible beneficiaries where the allocation to each and every beneficiary is equal, the deposit insurance coverage is $250,000 times the number of unique eligible beneficiaries.
C. Questions must be answered to determine FDIC insurance coverage
Seven questions must be answered in order to determine FDIC insurance coverage for a revocable trust. They are:
1. Who are the owners of the trust account?
• In informal trust accounts, the depositor is the owner of the account. In formal revocable trusts, the owner is commonly referred to as a Grantor, Trustor or Settlor. Trustee and successor trustee designations are irrelevant in the determination of deposit insurance coverage.
2. Who are the primary unique beneficiaries upon the death of the owners?
• At the time a bank fails, the beneficiary must be entitled to his or her interest in the revocable trust assets upon the grantor’s death and that ownership interest does not depend upon the death of another trust beneficiary. Contingent beneficiaries do not count. Life estate beneficiary interests are allowed up to $250,000 in deposit insurance coverage.
3. Are the primary unique beneficiaries “eligible”?
• Eligible beneficiaries are natural persons, charities or non-profit organizations recognized as such by the Internal Revenue Service. The FDIC no longer looks to see if a beneficiary is “qualifying” - that is a parent, sibling, spouse, child or grandchild of the grantor. If the named beneficiary cannot under state law receive funds when the owner dies, the beneficiary’s interest is considered invalid .
4. Are the primary unique beneficiaries identified in the bank’s deposit account records (for informal trusts) or in the trust agreement (for formal trusts) living?
• The death of either an owner(s) or beneficiary(ies) can impact the calculation of deposit insurance coverage.
5. What is the dollar amount or percentage interest each owner has allocated to each primary beneficiary?
• Assuming the owner is attempting to insure $1,250,000 or less with five or fewer unique eligible beneficiaries, the coverage is calculated as follows for each owner naming:
1 beneficiary = up to $ 250,000 insurance coverage
NOTE: If there are two owners, the deposit insurance coverage amount is calculated using: (# of owners) times (# of beneficiaries) times $250,000
• Assuming the owner is attempting to insure more than $1,250,000 with six or more unique eligible beneficiaries with EQUAL interests, the coverage is calculated as follows for each owner naming:
6 beneficiaries = up to $1,500,000 insurance coverage
• Assuming the owner is attempting to insure more than $1,250,000 with six or more unique eligible beneficiaries with UNEQUAL beneficial interests, the FDIC will compute the deposit insurance coverage based on the greater of either the specific allocations provided for under the trust agreement or the minimum amount of at least $1,250,000.
6. Does the owner(s) have any other revocable trust accounts in the same bank?
• In calculating deposit insurance coverage for revocable trusts, the FDIC combines the interests of all beneficiaries the owner has named in all formal and informal revocable trust accounts at the same bank.
7. Are the revocable trust accounts properly titled?
• The account title at the bank must indicate that the account is held pursuant to a trust relationship. This rule can be met by using the terms living trust, family trust, or any similar language, including simply having the word “trust” in the account title. For informal trusts, descriptive language such as POD or ITF (In Trust For) must be in the account title.
D. Examples
Unequal Beneficiary Allocations – POD Account
Are these accounts fully insured? YES!
When five or fewer unique eligible beneficiaries are named, the insurance coverage is calculated as the number of owners times the number of beneficiaries. In this example, with one owner and two beneficiaries, the coverage is $500,000:
Since the total of both accounts is $400,000, this amount is fully insured because the combined balance is less than $500,000
Example 2: Balance
Are these accounts fully insured? NO!
XIII. AUTHORIZED SIGNERS
Normally, under the law, an “agent” cannot appoint sub-agents. Thus, if John Doe, as grantor of the John Doe Revocable Living Trust, appoints himself and Sally Smith as co-trustees, Sally cannot appoint a third party to act as trustee in her place. Many times on a living trust account the grantor will want to add an authorized signer. The bank needs to check the language in the trust instrument itself to see if this is possible. If the trust instrument is silent on the issue, there are at least three alternatives:
A. the bank may decline to recognize the authority of the authorized signer; or
B. the bank may ask that an amendment be made to the trust to permit the appointment of authorized signers (assuming the trust is subject to amendment); or
C. the bank may request a signed, dated letter of authorization from the grantor and trustee authorizing the bank to recognize the additional signer on the account.
XIV. BORROWING AUTHORITY
In some instances, the grantor will wish to obtain a loan in his personal capacity yet pledge trust property as collateral. The authority of the trustee to make such a third-party pledge is somewhat questionable. In the absence of the specific empowering language in the trust instrument, the bank may ask the grantor to amend the trust to grant the trustee such authority.
XV. CONCLUSION
A revocable living trust can be a marvelous probate-avoidance device. In order to accommodate properly trust ownership of deposit accounts, safe deposit boxes and other titled assets, as well as the trust’s borrowing needs, the bank should obtain appropriate documentation from the grantor. Both the bank and the grantor benefit when the bank is the given sufficient information to deal with the trust.
In requesting information about a living trust, you may encounter questions from the attorney who drafted the instrument. This may be particularly true when asking the grantor to provide information about the beneficiaries of the trust.
One of the primary benefits of trust use is the privacy it affords to the grantor. That privacy is reduced if the financial institution requires the grantor to divulge the identities of the beneficiaries and the circumstances under which they will receive money or property.
Accordingly, in deciding whether or not to require beneficiary information with respect to a living trust you may wish to consider the following.
A. Is the trust sufficiently large that FDIC insurance coverage is a concern? And,
B. Is the grantor asking to set up a NOW account for the trust?
Only in those two instances do you have a legitimate need to know who the beneficiaries are and when and how they receive their share of the deposit. If the funds do not pose a deposit insurance coverage problem and the trust will not have a NOW account, you do not need to obtain this information.
Also, even if the amount of the deposit is large, you may simply want to explain to the customer how the FDIC insurance coverage works and leave to the customer the decision of whether the insurance is important enough to him to make him want to disclose the necessary beneficiary details to the bank.