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.