A Refresher on Trust Accounts
Even without trust powers, CUs can open trust accounts.
Your member walks in with a very legal-looking document, and says, “I’d like to open a trust account, and I want to make sure that my funds are fully insured. What’s the maximum I can put in the account?”
This scenario is enough to make many employees hesitate, even if they believe they’re adequately trained on credit union account-opening procedures.
So let’s review the basics on trust accounts: Federal credit unions don’t have trust powers. That means they don’t administer trusts, such as making decisions on how to manage investments. (While a few state laws may allow state credit unions to do so, it’s unlikely any credit unions do.)
A number of credit unions do offer their members access to full trust services through credit union service organizations. But even without trust powers, credit unions can open trust accounts.
NCUA addresses trust accounts in its regulations on share insurance coverage that the National Credit Union Share Insurance Fund (NCUSIF) provides. Section 745 of the rules, its accompanying appendix with examples of share insurance coverage, and some of NCUA’s legal opinion letters provide the only agency direction for federally insured credit unions on trust accounts.
Although it’s unlikely share insurance coverage will ever be triggered, credit unions must understand how various combinations of ownership and beneficiaries of trust accounts affect share insurance coverage.
Types of trust accounts
Basically, there are two types of trusts: revocable and irrevocable. One type of “revocable trust” is typically known as “payable-on-death” accounts (PODs), where the member has designated one or more people to receive whatever funds are in the account at the time of the member/account owner’s death. Most credit unions, undoubtedly, have a lot of revocable trust accounts and employees may not even think of them as being “trust accounts.”
The other typical revocable trust account is established because a member has created a living trust. Members may put many of their assets in a trust during their lifetime, have full access to use these assets, and designate beneficiaries to receive any assets that remain in the living trust upon the death of the trust owner(s).
As the name implies, the member can dissolve the trust during his life and change beneficiaries at any time. The person who sets up the trust is typically his own trustee and can decide to put some of the assets from the living trust into a revocable trust account at the credit union. This person/trustee must be a member of the credit union.
A written trust agreement establishes an irrevocable trust where the grantor of the trust contributes funds and gives up all power to revoke the trust. Trust money can be put into a trust account at the credit union. NCUA requires that either all of the grantors (the people funding the trust) or all of the beneficiaries of an irrevocable trust account be members of the credit union.
There’s one exception to the rule that credit unions don’t have trust powers and don’t act as trustees. Credit unions are the designated trustees when they open individual retirement accounts (IRAs) and Keogh accounts for members, as authorized in Section 724 of NCUA’s regulations. (And IRAs and Keoghs are insured up to $250,000 separately from the member’s other accounts at the credit union.)
NEXT: Setting up trust accounts
Setting up trust accounts
PODs are easy to set up and don’t require the member to provide any information about the existence of a trust. Although NCUA “encourages” credit unions to separately label the title of a revocable trust account with terms that indicate the account is a trust, such as POD or “in trust for,” it isn’t a regulatory requirement.
The credit union may want contact information for the listed beneficiaries. Keep in mind, if a member opens an individual account and later simply adds a beneficiary, the account becomes a POD revocable trust account and, as explained below, triggers different share insurance coverage.
Beyond PODs, opening trust accounts becomes more complicated. “Each trust document is as unique as the attorney who drafts it—none of them looks alike,” explains Kim Bohannon, a compliance and risk management officer with Knoxville (Tenn.) TVA Employees Credit Union.
When the member arrives at the $1 billion asset credit union with a trust document—which could range from a few pages to 100 or more pages—and asks to open a trust account, Bohannon ideally prefers the member provide only a one-page “declaration” (other terminology might be a synopsis, memorandum of trust, or a certificate of trust) that includes simply the information the credit union needs to open the account.
“Not only will this make it easier for the credit union to get the necessary information, but it also makes it clear to your member that the credit union isn’t administering the trust,” she says.
The necessary information from a one-page trust declaration, according to Bohannon, includes:
► The title of the trust;
► The date the trust was executed;
► The name and contact information of the trustee (if this is a revocable trust, typically the member who is setting up the trust for his own benefit);
► The name and contact information of the successor trustee (always important—remember a revocable trust becomes an irrevocable trust upon the death of the person who sets up the living trust);
► The name and contact information of the grantor/trustor/settlor—the person who is funding the trust (who will be the member in a living trust); and
►The name(s) of the beneficiaries.
Always have your member guide you through the information on trust account forms, Bohannon says. “Never guide them. You don’t want to be trying to interpret the trust documents.”
And ask your member which tax identification number to use when opening a trust account, she says. A formal trust agreement will likely have a separate tax ID number the trust lawyer already obtained. “It’s important that the credit union assumes nothing and carefully follows the member’s instructions,”
Data processing systems can create challenges to maintain the information necessary for a trust account, such as identifying a tax ID number different from that on the member’s regular account. Certain information, such as authorized signers, should be readily accessible. But you may have to link to images to access other information on the trust application or declaration.
Share insurance coverage
► NCUA’s Share Insurance Tool Kit, which features frequently asked questions, insurance coverage calculator, and informational brochures.
Funds held in a revocable trust account (including PODs) are insured, for each owner, up to $250,000 for each beneficiary. That’s separate from any individual accounts held by the same person. This means that if a member has a revocable trust account with two beneficiaries, the account can be insured up to $500,000 (one owner x two beneficiaries x $250,000).
If there are two owners of the trust account such as husband and wife, and they list their two sons as beneficiaries, then the maximum amount of coverage can double to $1 million (two owners x two beneficiaries x $250,000).
Expanding insurance coverage is limited to five beneficiaries—above that number the beneficiaries’ proportional interest will be considered. In a revocable trust, a beneficiary doesn’t have to be a member of the credit union to qualify for insurance coverage.
There’s still some confusion about “qualified beneficiaries.” Before October 2008, NCUA limited beneficiary insurance coverage on revocable trust accounts only to those considered “qualifying beneficiaries” (spouse, child, grandchild, parent, or sibling).
Since 2008, beneficiaries named in a revocable trust account that are natural persons, charities, or nonprofit organizations are insured separately.
This doesn’t mean that a member can’t list a business (or even a pet unless your state law prohibits it) as a beneficiary. It just means additional insurance coverage won’t exist and the funds in the trust account will be calculated under the individual share insurance rules.
Under an irrevocable trust account, the interest of each beneficiary has separate coverage up to $250,000. Irrevocable trust accounts established for the same beneficiary by the same grantor at the credit union are added together and insured up to $250,000 in the aggregate, separately from other accounts of the grantor or beneficiary. If for some reason the trust agreement isn’t valid under state law, the funds will be treated as an individual account for insurance purposes.
The primary caution with trust accounts is that the credit union is the account-holding institution, not the trustee, manager, or administrator of the trust funds. Bohannon compares a trust account to the credit union’s special vacation account.
“The credit union just opens the account and holds the funds,” she says. “We don’t tell the members where to go on vacation, who to take with them, or how to spend the funds. The trust account is similar. The credit union only holds the funds and doesn’t have anything to do with how the funds are disbursed.”
COLLEEN KELLY is CUNA’s federal compliance counsel.