The FDIC's Board of Directors today adopted changes to simplify the rules for determining the coverage available on revocable trust accounts - commonly called payable-on-death accounts or living trust accounts. The interim rules, which are effective immediately, eliminate the concept of qualifying beneficiaries, so that coverage is based on the naming of virtually any beneficiary.
Under the revised rules, coverage for the vast majority of account owners generally is based on the number of beneficiaries named in a depositor's revocable trust account(s). The insurance limit will still be based on $100,000 per named beneficiary. For revocable trust account owners with more than $500,000 in such accounts naming more than five beneficiaries, the coverage is the greater of either $500,000 or the sum of all the named beneficiaries' proportional interest in the trusts, limited to $100,000 per different beneficiary.
"We believe the interim rule will not only result in faster deposit insurance determinations after bank closings, but will help improve public confidence in the banking system," said FDIC Chairman Sheila C. Bair. "We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records."
The new rules are effective as of today and apply to all existing and future revocable trust accounts at FDIC-insured institutions.
Comments on the interim rule are due no later than 60 days after the interim rule is published in the Federal Register. Publication is expected to occur within a week.
Two nice things about this change is that it'll make it easier for people to extend FDIC coverage of their deposits, and it should reduce the time it takes the FDIC to release insured deposits over $100K when banks fail. The FDIC shouldn't have to seek documentation that ensures the beneficiaries are qualifying. In my post on extending FDIC coverage, I documented cases in which readers had delays in receiving their deposits after IndyMac's failure due to this qualifying beneficiary requirement.
There's one important thing that's missing from this change to simplify the rules. Before this current change, here were the three requirements described by the FDIC that allow an owner of a POD account to be insured up to $100K for each beneficiary:
- The account title must include a commonly accepted term such as "payable-on-death," "in trust for," "as trustee for" or similar language to indicate the existence of a trust relationship. The term may be abbreviated (for example "POD," "ITF" or "ATF").
- The beneficiaries must be identified by name in the deposit account records of the insured bank.
- The beneficiaries must be "qualifying," meaning that the beneficiaries must be the owner's spouse, child, grandchild, parent, or sibling. Adopted and step children, grandchildren, parents, and siblings also qualify. Others including in-laws, cousins, nieces and nephews, friends, organizations (including charities) and trusts do not qualify.
In the press release, the FDIC chairman was quoted as saying "We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records." She did not mention anything about the account title. Does she even know about it? I would like to see the FDIC also get rid of requirement #1. Many readers have reported problems in getting their banks to comply with this account title requirement. It adds risks to the depositors and it adds complications to the banks. I can't think of a good reason why it should be kept.
Another question I have is what happens if the beneficiary dies? Currently, the extra FDIC coverage ends immediately upon the death of a beneficiary. This is different than if a joint account holder dies. In that case, the other owner has a 6-month grace period before the extra FDIC coverage ends. Why not make the same grace period for revocable trust accounts?
Update: Details of this new interim rule and addresses for sending comments are available at this FDIC webpage. Here's one important detail that was described: "Under the interim rule, coverage is based on the existence of any beneficiary named in the revocable trust, as long as the beneficiary is a natural person, or a charity or other non-profit organization."