WASHINGTON (10/20/08)—Although the National Credit Union Administration (NCUA) still has to make technical corrections to its interim regulation on how to calculate share insurance coverage on revocable trust accounts, credit unions can find examples of how the new beneficiary rules work on the agency's website, advised the Credit Union National Association (CUNA). The NCUA rule parallels Federal Deposit Insurance Corp. coverage and was effective Oct. 3. According to Kathy Thompson, CUNA’s senior vice president for regulatory compliance, for a living trust account with up to five beneficiaries, the account will be insured up to $250,000 per each beneficiary (up to $1.25 million) – the agency won’t look at each beneficiary’s proportional interest in the account to calculate the insurance coverage. For instance, if there are three beneficiaries of a living trust account with a balance of $800,000, the account will be insured for $750,000 – regardless of how the trust document itself calls for dividing the $800,000 among the three beneficiaries. For a living trust account with more than 5 beneficiaries, the account will be insured for the greater of $1.25 million or the aggregate of all beneficiaries' proportional interests in the trust, limited to $250,000 per beneficiary. An example provided in the NCUA's share insurance training Power Point presentation helps to clarify how to calculate coverage, she said. In an example provided:
* Adam has a living trust account with a balance of $1,500,000. Under the terms of the trust, upon Adam’s death, Adam’s three children are each entitled to $125,000, Adam’s friend is entitled to $12,500, a designated charity is entitled to $175,000, with the remainder of the trust assets going to Adam’s wife. Since there are 6 beneficiaries, the insurance coverage on Adam’s account would be the greater of $1,250,000 or the aggregate of each different beneficiary’s interest to a limit of $250,000 per beneficiary. * Although the spouse’s interest in the account upon Adam’s death would be $937,500, the rule limits the coverage calculation to $250,000, so the aggregate of the beneficiaries’ interests is $812,500. But the insurance coverage would be $1,250,000 (the greater of $1,250,000 or $812,500).
Thompson added an example to show how insurance coverage can exceed $1.25 million – so credit unions shouldn’t mistakenly think the $1.25 million figure is a cap. Assume, she says, that Adam has $1,500,000 in his living trust account at the credit union and has six beneficiaries. He plans to leave $250,000 to each of his three children, $100,000 to his friend, $300,000 to charity and the remainder ($350,000) to his wife. The share insurance coverage on this account would be $1.35 million (5 beneficiaries times the $250,000 limit + $100,000 to the friend). However, Thompson also clarified that credit unions won't know the details of the living trust agreement. They aren't required to have the names of the beneficiaries in their records, let alone know the proportional interest of each beneficiary, said Thompson.Therefore, a credit union isn't in a position to exactly calculate the insurance coverage if asked by the member who owns the living trust account. But the member should be able to determine the member’s insurance coverage by applying these rules to his or her plan of distributing the money in the account upon death.