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