September 26, 2008

Major news for all insured banks and thrifts. The FDIC has adopted an interim rule today, September 26, 2008, that dramatically impacts the FDIC deposit insurance coverage for revocable trust accounts and payable on death accounts.

UPDATED 9/29/2008

Update Your Employees Immediately
Up until today, the FDIC rules provided that Payable On Death ("POD") accounts could be insured on a per beneficiary basis up to $100,000 per beneficiary, but only if the beneficiary was "qualifying." In order to be "qualifying," a beneficiary had to fall within one of five categories of relationships to the owner: the beneficiary had to be a spouse, child, grandchild, sibling or parent of the owner of the account. The same held true on revocable trusts (with the additional requirement that the funds had to be set up to go to the beneficiary, or be set aside for the beneficiary) upon the death of the owner.

That has ALL CHANGED. The FDIC has adopted an interim rule amending the deposit insurance provisions on revocable trusts and payable on death accounts. It takes effect immediately (September 26, 2008). While the final language of the interim rule is not available yet, we do know the following:
Join Mary Beth Guard on October 2, 2008 for a special BOL Learning Connect webinar on
"Deposit Insurance: What You Need to Know NOW."
She'll cover the full set of deposit insurance regulations, including the new changes. The first hour will be a "train the trainer" session. The second hour will contain the actual training for frontline employees. If you're a trainer, you can watch both and see exactly how to do it in your own institution. If you want to simply train your own employees, invite them in to watch the second hour only.

And remember, you can utilize the 30-day playback in the archive to schedule the training at a date and time convenient for your staff.

Register now.
  • The concept of qualifying beneficiaries is being eliminated.

  • Virtually any beneficiary may potentially qualify for per beneficiary coverage. In addition to natural persons, the FDIC rule will cover beneficiaries that are charitable organizations or non-profit entities recognized under the Internal Revenue Code. For those customers who want to make someone else the beneficiary of their largesse (or who have small families and few options within the five former categories), this is MAJOR news. For example, a depositor can now designate a beloved friend, life partner or relative outside of the former "immediate family" group. Non-profits and charities may be able to promote POD (where permitted by state law) and revocable trust beneficiary designations as part of their planned-giving programs.

  • There are limits. If a revocable trust has more than $500,000 in it (and presumably if a POD account has more than $500,000 in it), and it names more than five beneficiaries, the coverage is the greater of either (l) $500,000 or (2) the sum of all the named beneficiaries' proportional interest in the trusts, limited to $100,000 per different beneficiary. (So, let's say you have a trust that has $1 million in it and seven beneficiaries, all of whom are supposed to get an equal share. It would be insured for the greater of $500,000 or up to $100,000 per beneficiary. In our example, that would yield coverage of $700,000 -- up to $100,000 for each of the 7 beneficiaries, leaving $300,000 uninsured.)

  • The new rules apply not only to new accounts being opened on a go-forward basis, but also to existing accounts.
What we DON'T know at this point is whether the NCUA is going to follow suit and make similar amendments to its NCUSIF rules.

You can imagine the work that has been involved for the FDIC as receiver of failed institutions, attempting to ascertain after a bank failure which beneficiaries truly were qualifying in order to determine the amount of coverage. "Is this really the sister of the depositor? What proof is there that this is the account holder's grandchild?" That task delayed payout to insured depositors and was probably time-consuming and expensive for the receiver. This eliminates the need to do anything other than examine how the account is owned, the amount in the account, the proportion due to the different beneficiaries. It also opens up new avenues for depositors to further maximize deposit insurance.

Make sure anyone in your institution who may be asked questions about deposit insurance is aware of this change. Forward this briefing. Print it out for anyone (particularly those in new accounts) who may not have email.

Here's a link to the FDIC document submitted for publication of the interim final rule in the Federal Register. We will add a link to the actual publication when it's completed. The FDIC has completed its update of EDIE (the Electronic Deposit Insurance Estimator) to reflect these changes.