May 2008 Legal Briefs

New FDIC Guide to Deposit Insurance Of Trusts & POD Accounts

  1. Qualifying Beneficiaries
  2. One-Owner Revocable Trusts
  3. Revocable Trust Becomes Irrevocable
  4. Primary & Contingent Beneficiaries
  5. Changed Amount of Insurance?
  6. Certificate of Trust?
  7. Life Estate & Remainder Beneficiaries
  8. Joint Revocable Trusts
  9. POD Accounts
  10. Contingent POD Beneficiaries
  11. Joint Accounts with PODs
  12. Irrevocable Trusts

New FDIC Guide to Deposit Insurance Of Trusts & POD Accounts

The FDIC has released an 83-page “Guide to Calculating Deposit Insurance Coverage for Revocable and Irrevocable Trusts.”  It discusses insurance coverage for trusts, and for POD accounts–which are considered informal trusts.  (This is available at by searching the words “FDIC Guide.”)

There’s plenty of information in the Guide, including examples of how slight changes in assumptions regarding trust beneficiaries can change the amount of insurance available for a trust’s deposits. This material is excellent for training or review.

There are some surprises in the Guide, particularly regarding insurance of joint tenant accounts with POD provisions, and joint trust accounts in general.  The Guide elaborates on several concepts that are covered only briefly in the FDIC insurance regulation.  I will review some of the basic principles explained in the Guide, and also some of the more interesting conclusions. 

1. Qualifying Beneficiaries

Deposits held in revocable trusts (while the grantor is alive) or in POD accounts (considered to be “informal” trusts) are eligible for FDIC insurance coverage of up to $100,000 for each “qualifying” beneficiary who is also “primary” (as explained below).

During the lifetime of the grantor/owner of a revocable trust (and for up to six months after that person’s death), the FDIC will insure a revocable trust’s deposits based on existence of “qualifying” beneficiaries who are within a required degree of kinship to the trust’s owner.  (More than six months after the owner’s death, the FDIC no longer insures a trust’s deposits based on “qualifying” beneficiary status.)

12 CFR Section 330.10(a) defines “qualifying beneficiaries” of a revocable trust (or POD account) as the deposit owner’s spouse, children, grandchildren, parents, brothers and sisters.  Adoptive and step-relationships are counted the same as biological relationships.  Included are an adopted child or adopted grandchild; a step-child (a spouse’s child) or a step-grandchild; and a step-parent (the spouse of a biological parent) or adoptive parent.  

When there are two owners of an account with beneficiaries—either (1) a joint living trust (sometimes called a “family trust”), or (2) a joint tenant account with POD beneficiaries—the person calculating the amount of FDIC insurance should note especially whether the designated beneficiaries are “qualifying” beneficiaries for both account owners or only for one of them.

The FDIC generally treats a joint tenant account with POD beneficiaries (or joint trust) as owned “half and half” by the two individual owners. If both halves of the account have identical beneficiaries—for example, if the account is styled in the names of Bob and Mary, joint tenants with right of survivorship, POD to Sam—the FDIC will treat Bob’s half as POD to Sam and Mary’s half as POD to Sam, for FDIC insurance purposes. It can make a big difference if only one of the two owners has the necessary kinship relationship with the beneficiary, Sam.

A parent named as a POD beneficiary is a qualifying beneficiary for only one of the spouses, and is eligible for “per-beneficiary” coverage only on the half of the account belonging to that spouse.  Similarly, a brother or sister will be a qualifying beneficiary of one spouse but not the other. (I will discuss later the method of calculating deposit insurance on joint trusts, and on joint tenant accounts with POD beneficiaries.)

The FDIC rules dealing with children and grandchildren are more flexible:  The adult child or grandchild of one spouse is not biologically related to (and maybe not adopted by) the other spouse in the case of second marriages, but is still a step-child or step-grandchild of the other spouse.  On this basis, the child or grandchild is considered a qualifying beneficiary of both spouses.

2. One-Owner Revocable Trusts

 During the grantor/owner’s lifetime, deposits in a one-owner revocable/living trust (or one-owner POD account) are insured up to $100,000 per qualifying beneficiary, as set out in 12 CFR Section 330.10. 

Any portion of a trust’s deposit account (or an individual’s POD account) that is designated for a non-qualifying beneficiary (for example, an amount payable to a charity after the owner’s death, or any amount designated for a niece or a great-grandchild) will not receive “per-beneficiary” coverage. 

All portions of a deposit account that are designated for non-qualifying beneficiaries must be added together and counted as using part of the owner’s “single ownership account” insurance coverage–which is limited to $100,000.  (Non-qualifying beneficiaries’ shares of trust deposits or POD accounts may be fully insured, or not, depending on whether the owner’s $100,000 single-ownership coverage is exceeded by combining non-qualifying beneficiaries’ trust interests with the owner’s other single-ownership accounts, if any.)

3. Revocable Trust Becomes Irrevocable

A single-owner revocable trust always becomes irrevocable upon the owner’s death.  (The trust’s name may include the word “revocable,” but the trust is still “irrevocable” after the owner dies and is no longer able to revoke it.)  When a bank sets up a successor trustee to sign on a revocable trust account, it should determine whether the owner is still alive.  The grantor/owner’s death can substantially decrease the available amount of deposit insurance.

For six months after the owner’s death, 12 CFR Section 330.3(j) allows a “grace period” during which the deposit insurance available to a revocable trust remains in effect.  After the six-month period has passed, the trust’s deposits are insured instead under provisions applicable to irrevocable trusts (Section 330.13).  The six-month transition allows time for the trust either (1) to distribute funds to beneficiaries (if that’s what the trust provides), or (2) to move some deposits to other banks, in order to remain fully insured.

A successor trustee will certainly take control of a trust after the grantor/owner’s death, if not before.  If the trust’s deposits exceed $100,000, the successor trustee’s visit to the bank may be an excellent time to explain how deposit insurance can change after the owner’s death.

4.  Primary & Contingent Beneficiaries

For deposits of any trust that remains revocable (with a living grantor/owner) or for POD accounts, “per-beneficiary” FDIC insurance coverage is available up to $100,000 per beneficiary, provided that a beneficiary (1) is a “qualifying” beneficiary (explained above), and also (2) a “primary” beneficiary. 

In simplified terms, a “primary” beneficiary stands “first in line” and would definitely acquire some underlying share in the trust (or POD account) if the owner dies today.  There may be one primary beneficiary or several, on a trust’s deposits (or POD account), depending on the circumstances.  

Beneficiaries must remain alive in order to remain “primary”—although on a POD account a deceased beneficiary’s estate usually “steps into the shoes” of the deceased person and becomes a primary beneficiary.

When death causes a “primary” beneficiary of a revocable trust to drop out of that category, someone else always takes that person’s place as a primary beneficiary.  At any point in time, FDIC “per-beneficiary” insurance coverage is available only with respect to beneficiaries who are “primary” at that time.

Unlike “primary beneficiaries, the FDIC provides no “per-beneficiary” insurance for “contingent” beneficiaries, who are simply ignored for deposit insurance purposes—until their status changes.  

A “contingent beneficiary”—for FDIC insurance purposes—is someone who (at least currently) is only in “second-choice” or “second-string” position, and may never be anything more.  A trust agreement is written so that a “contingent beneficiary” steps into “primary” position only if someone dies who was ahead of him and “primary.”  An example will help to illustrate this:

 Let’s say that a trust agreement provides, “After my death, all assets in the trust shall be distributed to my three children, Child 1, Child 2, and Child 3, in equal shares; but if any child dies before me, that deceased child’s share shall instead be distributed to the children of my deceased child.”  In this case the trust owner’s children (as long as they remain alive and the owner remains alive) are “primary” beneficiaries.  Outliving their parent (the owner) is all that stands between them and an inheritance. During the owner’s life and for six months thereafter–if each of the children remains alive at least until after the owner’s death–the FDIC will provide up to $100,000 of “per-beneficiary” coverage for  Child 1, Child 2 and Child 3 (all living), or a total of up to $300,000.

In this example the grandchildren are “contingent beneficiaries.” The fact that they are mentioned in the trust agreement has no relevance for insurance purposes, and they will simply be disregarded, while their parent is alive.  Before a grandchild can become a “primary” beneficiary with rights to receive an interest in the trust, more than the death of the trust’s owner must occur.  (A grandchild’s own parent would have to die–before the owner of the trust dies–in order for a grandchild as “contingent beneficiary” to become a “primary” beneficiary in this example.)

5.  Changed Amount of Insurance?

If a bank holds a trust’s deposit account long enough, events may occur that will change the group of “primary” beneficiaries.  Each such change might change the amount of deposit insurance available for the trust’s deposits.  When a trust has large deposits, the amount of FDIC insurance coverage should be re-examined each time the group of “primary” beneficiaries changes.  (After a deposit account is set up, the owner tends not to focus on the possibility that certain events may change the available amount of insurance.) 

In the example provided above, let’s assume that Child 1 and Child 2 are still living, but Child 3 dies (while the trust’s owner is still alive).  Child 3 leaves behind two children (grandchildren of the trust’s owner).  Child 3’s otherwise-applicable right to receive a one-third share of the trust assets at the owner’s death will pass instead to the two children of deceased Child 3, each of whom is entitled to one-sixth.  Upon Child 3’s death his two children become “primary” beneficiaries.  (They were already “qualifying” beneficiaries of their grandparent.)

The shares of the trust to be inherited by these two grandchildren are only half as large as the shares to be inherited by Child 1 and Child 2.  In this example there are four “primary” beneficiaries (Child 1, Child 2, and two children of deceased Child 3), but the interests of the four beneficiaries are not equal in amount.  After this change in events, it’s no longer possible to multiply the number of beneficiaries by $100,000 to determine the maximum amount of deposit insurance.  (The trust would not be insured for $400,000.) 

In this example, the trust’s owner might tell a bank officer accurately that there are four primary beneficiaries and all of them are qualifying; but this information is not enough for the bank to determine the amount of FDIC insurance available for the trust’s depositsWhenever beneficiaries’ shares at not equal—particularly when the trust’s total deposits exceed $100,000–the bank needs to know what amount each beneficiary is entitled to receive. 

In the scenario just stated above, the maximum amount of deposit insurance for the revocable trust is still only $300,000—although there are four primary beneficiaries.  (Whichever beneficiary has the largest share of the trust’s deposits must still have a share no larger than $100,000, if the trust’s deposits will be fully insured.  In this case, Child 1’s one-third share of total trust deposits cannot be larger than $100,000, and the same is true of Child 2’s share.)

Let’s consider a slightly different trust provision:  “The assets of my trust shall be distributed to my three children, Child 1, Child 2 and Child 3, in equal shares; but if any child dies before me without leaving a child or children of his own, that deceased child’s share shall be divided instead among my children who are still living.”  If Child 3 dies while the owner is alive (and Child 3 leaves no children), Child 1 and Child 2 would each receive a one-half share of the trust’s assets, instead of one-third.  Because the beneficiary with the largest share of the trust’s deposits is only insured for $100,000, the amount of deposit insurance for the trust drops immediately from $300,000 to $200,000 when Child 3 dies.

Here’s another scenario, where events may change the beneficiary (or beneficiaries) of the trust from someone who is “qualifying” to an entity or person that is “non-qualifying” for “per-beneficiary” insurance purposes.  The trust’s owner has no spouse or children, and no other relatives except a brother and sister, both in poor health.  The owner wants to provide continuing financial support to his brother and sister, if he should die first.  But neither sibling has other family, so if they die first the owner wants everything to go instead to the local church.  While the brother and sister are living the trust sets up a $200,000 deposit account, which is fully insured based on two “qualifying” beneficiaries—the owner’s brother and sister.  After the brother and sister die, but the owner remains living, the church becomes the “primary” beneficiary with respect to the trust’s deposit account—and the trust’s deposits are underinsured.  (If a beneficiary is “non-qualifying,” that beneficiary’s share of the trust’s deposits is counted as a “single-ownership” deposit of the trust’s owner.  In this example, the best available result–still not a very good one—would be to have deposit insurance up to $100,000.  (If the trust’s owner has other sole-ownership deposits, the “uninsured” amount will be still larger.)  The trust should move some if its deposits to another bank—if the owner is even aware of the problem.  

6.  Certificate of Trust?

Most banks don’t want to review a thirty-page trust agreement in order to open a deposit account for a trust.  It’s easier and much “cleaner” for a bank to obtain a brief “certificate of trust” instead (as allowed by Section 902(B) of the Banking Code).  In this document, a trustee summarizes certain trust provisions, including the beneficiaries’ names.  The bank is then permitted to administer the trust’s deposit account in reliance on the “certificate of trust,” assuming that the bank has no actual knowledge of facts to the contrary.

For most purposes this approach works extremely well, but it may be less than ideal from the standpoint of deposit insurance.  Everyone asks, “How much insurance is available for my trust?”  The bank’s answer may not be fully accurate if the beneficiary information given to the bank is inaccurate. 

(Maybe the owner has a less than complete understanding of the trust’s provisions.  Perhaps he forgets to mention some of the trust’s primary beneficiaries (the local church or other non-qualifying beneficiaries).  Or he mistakenly lists all beneficiaries who are either primary or contingent, when asked to list only those who are primary. Without intending to do so, the owner creates informational havoc, leading to a wrong “deposit insurance” conclusion.)

7. Life Estate & Remainder Beneficiaries

Section 330.10(f)(3) of the FDIC insurance regulation uses the terms “life estate beneficiary” and “remainder beneficiary,” which are frequently applicable in calculating “per-beneficiary” insurance coverage.

A “life estate interest” is “the right on the part of the beneficiary to receive money from a trust during the beneficiary’s lifetime.”  The trust agreement often provides that the income being earned currently on the trust assets (or as much of it as needed) will be paid to the “life estate beneficiary” during her lifetime.  (There’s often some language permitting the principal of the trust to be paid out, in addition to income, if necessary to support the “life estate beneficiary.”) 

A person commonly chosen as a “life estate beneficiary” is the trust owner’s surviving spouse; but the trust owner is free to designate anyone to receive financial support after his death. Others placed in this category might include an adult child with disabilities, or a sibling in poor health.  A “life estate beneficiary” is not like a “full-share” beneficiary, because the stream of funds ceases at the life estate beneficiary’s death, and that person’s estate gets nothing.

It should be clarified that a “remainder beneficiary” under a trust is not a “contingent beneficiary” as discussed earlier.  (Until a contingent beneficiary’s status is changed by some event, he has no right to receive anything from a trust. By contrast, a “remainder beneficiary” is certainly entitled to receive some portion of the trust’s assets—after waiting until the “life estate beneficiary” dies.) 

“Life estate beneficiaries” and “remainder beneficiaries” are all “primary” beneficiaries of a revocable trust for FDIC insurance purposes.  If they are “qualifying” they are all eligible for “per-beneficiary” insurance coverage. 

In simplified terms, a “life estate beneficiary” and a “remainder beneficiary” both have rights to enjoy some portion of the total “pie” that is the trust’s assets.  (No one knows in advance how big a piece of the pie the “life estate beneficiary” will need, or how much of the pie will be left for the “remainder beneficiary.”  The “life estate beneficiary” eats from the pie first, while the remainder beneficiary waits. After the “life estate beneficiary” dies, the “remainder beneficiary” gets to eat whatever remains of the rest of the pie.)

In an extreme case, supporting the “life estate beneficiary” could use up all of the trust’s assets, leaving nothing for the “remainder beneficiary.” But the FDIC assumes for insurance purposes that both the “life estate beneficiary” and the “remainder beneficiary” will receive portions of the trust’s assets. 

It’s usually during the lifetime of the trust’s owner—before the “life estate beneficiary” or “remainder beneficiary” has received anything—that the amount of FDIC insurance available for a trust’s deposits is calculated based on “qualifying” beneficiaries with future interests in the trust—the “life estate beneficiary” and “remainder beneficiary.” 

It may seem like an artificial exercise to try to value these beneficiaries’ respective interests in relation to each other:  It’s often impossible to predict (1) when the trust’s owner will die, (2) how much money will have to be paid out of the trust to support the “life estate beneficiary” during his lifetime, and (3) how much will be left for one or more “remainder beneficiaries” after the “life estate beneficiary” dies.  So the FDIC just uses a standard rule for determining what portion of trust assets belongs to the “life estate beneficiaries” and “remainder beneficiaries,” and what FDIC insurance is available for the trust.

The FDIC simply adds together the number of life estate beneficiaries and remainder beneficiaries, and divides the trust’s deposits by that total.  The result is each beneficiary’s “assumed” share of the trust’s deposits—an equal share for every life estate beneficiary or remainder beneficiary, without regard to any life estate beneficiary’s age, health, life expectancy, normal standard of living, etc.

Let’s assume that a revocable trust includes the following (simplified) language: “After my death, the income of the trust (and principal, if necessary) shall be used to support my wife for life.  After her death, the remainder of the trust’s assets shall be paid to my three children in equal shares.”  The wife and three children are all “primary” and “qualifying” beneficiaries.  They all have a current expectation of receiving trust assets in the future. With four such beneficiaries, the FDIC assumes that each person’s share of the trust is equal. The trust’s deposits will be insured on a “per beneficiary” basis.  (Four times $100,000 is $400,000.)

In a different example, a trust agreement provides that “income of the trust will belong to my wife [a life estate beneficiary] for her lifetime, and after her death the remainder of the trust’s assets shall be distributed to my only child” (a remainder beneficiary). This example includes one remainder beneficiary instead of three; but that fact has no impact on the FDIC’s assumption that the trust share of each life estate beneficiary is equal in value to the trust share of every remainder beneficiary.  In this case, the wife’s share would equal one-half of the trust deposits (for insurance purposes), and the child’s share is also one-half.  The wife and the child are “primary” and “qualifying.”  “Per beneficiary” coverage of the trust’s deposits is $100,000 times two, or a total of $200,000.

8.  Joint Revocable Trusts

Calculating the amount of insurance available for a joint trust can be one of the most difficult and confusing aspects of deposit insurance.(A joint revocable trust or “family trust” usually involves a husband and wife.  Each spouse owns “half” of the trust’s assets, as long as both of them are alive.)

A major problem in applying FDIC insurance rules to joint trusts is that beneficiary provisions may vary quite a bit from one trust to another. There may be no other way to get the deposit insurance answer “completely right” except to read the trust agreement.  (Sometimes a bank is given permission to talk with the attorney who drafted the trust, to gain a better understanding of beneficiary provisions and how those relate to deposit insurance. A revocable trust is an alternative to inheritance under a will, and can be as individualized as a will.)

In opening a new account a trustee might say, “I need to know exactly how much deposit insurance my trust will have.”  The trustee then provides beneficiary information that is not detailed enough to form the basis for a completely accurate answer.  The bank is forced to make some general assumptions.  For example, “If you have two beneficiaries on each half of the trust, the trust’s deposits may be insured for as much as $400,000.”  The customer says, “I need to know for sure that the deposits will be fully insured.” The bank officer replies, “To give a better answer, I have to read the provisions of your trust.”  Maybe the trustee says, “The details of my trust are none of your business. If you’re going to be difficult, I will take my deposits elsewhere.”  

When there are two “halves” of a joint trust (and both spouses are alive), FDIC insurance for a joint trust will be much the same as insurance provided for two separate one-owner trusts—one for the wife, and one for the husband.  (Imagine a line drawn down the middle of the joint trust, with each half considered separately, with its own beneficiary provisions.)

Assume that the husband’s half of the trust states (in simplified language), “If my wife survives me, income from my half of the trust shall be paid out to  support her for life, as needed, and after her death the remaining assets in my half of the trust shall be distributed in equal shares to my children–Bill and Mary.”  The wife’s half of the trust is a “mirror image” of this, stating, “If my husband survives me, income from my half of the trust shall be used to support him for life, and after his death all of the remaining assets of my half of the trust shall be distributed in equal shares to my children—Bill and Mary.”

How much deposit insurance does this joint trust qualify for?  For each half of the trust, a spouse and two children certainly all look like “qualifying” and “primary” beneficiaries; and each half of the trust is insured separately.  Will “his half” of the trust get $300,000 of deposit insurance, with $300,000 more for “her half,” or a total of $600,000? That’s the answer many bankers have believed to be true—but the Guide makes clear this is not a correct analysis.

For a one-owner revocable trust with almost identical provisions, the FDIC would recognize (1) a life-estate beneficiary (the opposite spouse) and (2) two remainder beneficiaries (the children).  With all three as “qualifying” and “primary,” the one-owner trust receives up to $300,000 of insurance.

But one spouse’s half of a joint trust is a bit different from the stand-alone one-owner trust just described.  The FDIC ignores any beneficiary provision payable from one owner of a trust to another owner of the same trust.  (With a one-owner trust there is no other owner; but in a joint trust there is.)  It’s not that the opposite spouse becomes a “non-qualifying beneficiary” in a joint trust. Rather, for insurance purposes the FDIC simply views the joint trust’s language making the opposite spouse a life-estate beneficiary as if it didn’t exist. 

For insurance purposes, the only beneficiaries that FDIC recognizes are “those persons or entities who shall become entitled to the trust funds following the death of the last owner—not persons or entities who shall receive funds prior to the death of the last owner.”  In the example above, the two children (Bill and Mary) are the only ones who will receive trust assets after both of their parents die.  The beneficiary provisions naming the opposite spouse are completely ignored, and on this basis the husband’s half of the trust is treated as having only two beneficiaries, Bill and Mary.  The wife’s half is also considered to have only two beneficiaries, Bill and Mary. The joint trust therefore qualifies for $400,000 (not $600,000) of deposit insurance.

To have a “full picture” of the amount of deposit insurance available under the circumstances, it’s also necessary to know (1) whether any owner of the revocable trust has a POD account at the same bank (outside the trust), payable to any of the same beneficiaries named in the trust, and (2) whether any owner of the revocable trust has single-ownership accounts at the same bank.

The first issue above is relevant for the following reason:  The FDIC views POD accounts as “informal revocable trusts,” and includes them in the same insurance category as “formal revocable trusts.”  If the husband’s half of a joint revocable trust names his son Bill as beneficiary, and the husband also has single-ownership accounts in his own name, POD to Bill, all of the amounts must be combined to determine whether Bill’s “per-beneficiary” insurance coverage of up to $100,000 has been exceeded.

The second issue can also be important.  If one spouse’s share of a revocable trust has non-qualifying beneficiaries (or at least some of the beneficiaries are non-qualifying), the non-qualifying portions will be insured like a single-ownership account belonging to the trust’s owner.  It is necessary to add together the owner’s single-ownership accounts plus any portions of his half of the trust that name non-qualifying beneficiaries.

As a general rule, if owners of a joint trust are living and have (1) no POD accounts outside the trust, and also (2) no single-ownership accounts outside of the trust, then the deposits of the joint trust should qualify for not less than $200,000 of insurance, no matter what else may be true.  This much can be assumed without reading the trust agreement—and may be all that the bank needs to know.  (If more than $200,000 of insurance is required, or if there are POD accounts or single-ownership accounts outside of the joint trust, the beneficiary provisions will need to be analyzed more carefully.)

As a matter of policy, the death of a trust owner should trigger a re-examination of how much deposit insurance will continue to be available—unless a trust’s deposits are so obviously within FDIC insurance limits that the identity of beneficiaries is irrelevant.  

9. POD Accounts

For insurance purposes, POD accounts are treated as “informal revocable trusts.”  Depending on the circumstances, POD accounts are insured either (1) on a “per-beneficiary” basis (for “qualifying” beneficiaries who are also “primary”) or (2) as single-ownership accounts of the owner, for any POD beneficiaries who are “non-qualifying.”

It’s not possible for a certain beneficiary’s share of a POD account to be insured partly on a “per-beneficiary basis” (up to $100,000 per “qualifying” beneficiary”) and partly by using the owner’s unused single-ownership insurance limits.  (Each POD beneficiary’s share of an account is analyzed “entirely” in the “per-beneficiary” insurance category, or entirely in the owner’s single-ownership insurance category.)

If a person’s only deposit account at a bank is a POD account with less than $100,000 (and there are no trusts, joint tenant accounts, or other accounts related to the individual), it would be safe to assume that the deposit is fully insured, without any further analysis.

10.  Contingent POD Beneficiaries

Until 2006, Oklahoma law would not allow a depositor to create an account with more than one layer of POD beneficiaries.  (Because “contingent beneficiaries” were not permitted on POD accounts, every named POD beneficiary was “primary,” and was entitled to receive a share equal to every other beneficiary’s share.Maybe “equal shares” is not what every accountholder wants, but this is extremely simple from the standpoint of calculating how much total deposit insurance an account can have and paying out the account balance after the accountholder’s death.)

As a general rule, if a POD beneficiary is named on an account the POD provision does not “lapse” because of the beneficiary’s death.  When the beneficiary dies before the accountholder dies (and the accountholder does not change the POD provisions), the deceased’s beneficiary’s share is payable to the deceased beneficiary’s “estate,” and not to any “second-in-line” beneficiary.

However, Oklahoma’s POD statute (Section 901 of the Banking Code) was amended to provide that if there is only one named “primary” POD beneficiary, the accountholder can name “contingent beneficiaries” who will receive the funds (in equal shares) if the primary beneficiary dies before the accountholder dies.  (When contingent beneficiaries are named and the primary beneficiary dies before the accountholder, the primary beneficiary’s estate will not receive any funds from the POD account upon the accountholder’s death.)

When a POD account has one primary beneficiary and one or more contingent beneficiaries, the contingent beneficiaries’ existence is ignored for purposes of FDIC insurance.  Although the primary beneficiary and the contingent beneficiaries are all in a correct relationship to the accountholder to be considered “qualifying” beneficiaries, only the person who is a primary beneficiary will receive “per-beneficiary” insurance coverage.  Maximum deposit insurance is $100,000 while the only primary beneficiary is alive.

If the primary beneficiary dies before the accountholder, the contingent beneficiaries will immediately step up to become primary beneficiaries.  After this change, the maximum amount of deposit insurance available for the POD account will be $100,000 times however many beneficiaries there are to step up into “first place”—assuming that all of them are “qualifying.”

11.  Joint Accounts with PODs

Formerly it was not permitted to add POD beneficiaries to joint tenancy accounts; but in November 2001 Section 901(B) of the Banking Code was changed to allow this.  The new provision has a clear sequencing of steps:  A POD provision added to a joint account will not take effect until all joint tenants except the last one have died.  By first applying the joint tenant provisions, someone has to become the sole surviving owner of the joint account before the POD provisions can take effect.  
My understanding of these accounts has been that they are insured based on “joint ownership” coverage, until there is only one owner left—at which time the account becomes “sole ownership,” the POD provisions kick in, and (I believed) the FDIC insurance would switch over to POD coverage at that point. I still can’t find anything in 12 CFR Section 330.9 (the “joint ownership” section of the FDIC insurance regulation) that tells me this would not be true; but it’s very clear from reading the Guide (contrary to my previous understanding of these accounts) that a joint ownership account with POD beneficiaries added will not qualify for “joint ownership” insurance at all. 

(In structuring deposits to use as many separate categories of FDIC insurance as possible–including (1) POD accounts (or revocable trust accounts), and (2) joint tenancy accounts–POD provisions must be left off the joint accounts, or else FDIC insurance under the joint ownership category will be lost.)

As the Guide indicates, a joint tenancy account with POD beneficiaries added will be insured in the same manner (and in the same category) as a joint revocable trust or other ordinary POD accounts. Like a joint trust, a joint account with PODs can be viewed as if it has an invisible line drawn down the middle:  Half of the funds are treated as belonging to the husband, and half belonging to the wife.  Any POD beneficiaries named on the joint account are treated as beneficiaries named separately on both his half and on her half.  If a joint account between husband and wife names as POD beneficiaries their children (Bill and Mary), the account will be insured up to $100,000 “per beneficiary” on the father’s half of the account, and up to $100,000 each on the mother’s half of the account.  On this basis, this joint account between husband and wife with two PODs qualifies for up to $400,000 of “per beneficiary” (POD) insurance (as an informal joint revocable trust), but receives no FDIC insurance at all as a “joint ownership” account. 

What is the insurance outcome if a joint tenancy account names POD beneficiaries that are non-qualifying?  Because of the POD provision, this arrangement is viewed as an informal revocable trust, not an account eligible for “joint ownership” insurance.  With “failed” beneficiaries (non-qualifying), this account falls back into each owner’s “single ownership” FDIC insurance coverage—half of the account is counted as a single-ownership account in “his” name, and half as a single ownership account in “her” name.  (This outcome may be a disaster for someone trying to structure accounts for maximum insurance; but from a standpoint of estate planning, it still may be exactly how the individuals want their money to be passed down.) 

I stated earlier that the only beneficiaries FDIC will recognize are “those persons or entities who shall become entitled to the trust funds following the death of the last owner.”  In treating the joint account with POD beneficiaries like a joint revocable trust, the FDIC is also saying that the joint tenancy provision that pays money over from one joint tenant to the other joint tenant is ignored.  Only the beneficiary provision paying money after the last owner’s death is recognized.

To qualify for FDIC “joint ownership” coverage (on a joint tenants account), the other joint tenant(s) must be the only one(s) with a right to receive money under the account’s provisions, now or later.  (The PODs must be left off.)

12.  Irrevocable Trusts

There are several categories of irrevocable trust.  Some are set up that way from the beginning—either during a wealthy person’s lifetime (as an estate-planning device), or in a trust created under a will. But the most common way that a trust becomes irrevocable is when the owner of a revocable trust dies.

(Every one-owner revocable trust becomes irrevocable upon the owner’s death—because the person who set it up can no longer revoke it.  In many joint revocable trusts, the deceased person’s half of the trust becomes irrevocable upon the death of the first owner.  But all joint revocable trusts become irrevocable at least by the point in time when the last owner dies.)

As stated above, there is a six-month “grace period” (after a trust first becomes irrevocable), before FDIC insurance coverage applicable to a revocable trust changes to the amount of insurance available to an irrevocable trust. 

The Guide gives a strong caution about the amount of deposit insurance available for an irrevocable trust:  “The FDIC’s experience indicates that, in many cases, the interests of beneficiaries of an irrevocable trust are subject to contingencies that negate eligibility for per beneficiary coverage. In light of the prevalence of contingencies in irrevocable trust agreements, the trustee of an irrevocable trust may wish to place no more than $100,000 of an irrevocable trust’s funds at any insured bank.”

Banks should be aware that (1) for a one-owner revocable trust, six months after the death of the owner the total deposit insurance may drop to $100,000; (2) for a joint trust, six months after the death of the first owner the amount of insurance available for the deceased spouse’s half of the trust may drop to $100,000 (but someone will have to read the trust carefully to be sure); and (3) certainly by a point in time six months after the death of the last owner of a joint trust, total deposit insurance for the trust could drop to $100,000.

It is at least possible for an irrevocable trust to have “per-beneficiary” insurance coverage up to $100,000 for the beneficiaries, but this category of insurance is the most complicated to understand. A bank should not assume that an irrevocable trust has more than $100,000 of deposit insurance available until someone who understands the requirements thoroughly has read the actual trust provisions.