ANALYSIS: The NCUA recently approved a final rule that simplifies its share insurance regulations by establishing a “trust accounts” category.
The trust accounts category will provide share insurance coverage for funds held in accounts at federally insured credit unions (FICUs) by both revocable and irrevocable trusts, as well as payable on death (POD) accounts. The rule will use a simplified formula to calculate coverage for those accounts.
Why the change?
Right now, the NCUA has separate share insurance rules for revocable trusts and irrevocable trusts. Each set of rules has its own criteria and methods for calculating coverage, which is often confusing for credit union staff and members.
The NCUA says that its share insurance specialists answered more than 17,000 calls with questions since the fourth quarter of 2019 and that more than 50% of those calls were about share insurance coverage for trust accounts (revocable or irrevocable). That doesn’t even count questions received through email, submitted through www.mycreditunion.gov, or directed to NCUA staff responsible for credit union liquidations.
The NCUA’s changes also align with deposit insurance rule changes that the FDIC made for its insured banks earlier this year.
New rule impacts coverage for POD accounts
Even if your credit union holds few accounts for trusts, it probably has many POD accounts.
It is important to note that the NCUA rule treats POD accounts as “informal revocable trusts.” The new “trust accounts” category in the NCUA’s share insurance rule includes those POD accounts, along with accounts held by formal, written revocable and irrevocable trusts that your members have established (often with help from attorneys).
As the NCUA wrote:
Funds associated with formal and informal revocable trusts are aggregated for the purposes of the share insurance rules; thus, funds that will pass from the same grantor to beneficiaries are aggregated and insured up to the SMSIA [the standard maximum share insurance amount], currently $250,000, per beneficiary, regardless of whether the transfer would be accomplished through a written revocable trust or an informal revocable trust.
Effective date
The NCUA’s changes to its share insurance rule for trust accounts will take effect on Dec. 1, 2026.
The NCUA said that the delay “is intended to provide FICUs, accountholders, and the NCUA time to prepare for the changes in trust account share insurance coverage. FICUs will have an opportunity to review the changes in coverage, train employees, and update publications if necessary. Accountholders may review insurance coverage for their funds and adjust their share account arrangements if desired.”
Membership still required
In publishing the new rule, the NCUA stressed that share insurance coverage is only available to FICU members and those otherwise entitled to maintain insured accounts.
As explained in The League’s ii Release No. 0116, trust membership requirements are different under state vs. federal law.
Wisconsin law
Under the 2017 Model Bylaws (as well as the 2005 version) for state-chartered credit unions, “any trust may become a member of the Credit Union if a majority of the persons who are settlor(s), trustee(s) and beneficiary(ies) are eligible for membership in the Credit Union.” It is unclear under Wisconsin law whether successor trustees and contingent trust beneficiaries must be counted.
Remember, however, that members of the immediate family of all qualified persons are eligible for membership. Your credit union’s bylaws will define who is considered an immediate family member. The Wisconsin Statutes no longer define that term. For details, see The League’s ii Release No. 0001.
Federal law
Under federal law for federal credit unions, the following membership rules apply:
- For revocable trust accounts, all grantors (sometimes described as settlors) must be members of the FICU or otherwise eligible to maintain an insured account to receive share insurance coverage.
- For an irrevocable trust account, all grantors (or settlors) or all beneficiaries of the trust must be members of the FICU or otherwise eligible to maintain an insured account to receive share insurance coverage.
The specifics of the new share insurance rule for trust accounts
The following material summarizes the key points of the new share insurance rule for trust accounts, found in §745.4 of the NCUA Rules & Regulations. For details, please consult the rule directly.
Merger of revocable and irrevocable trust categories
As explained earlier, current share insurance rules treat revocable and non-revocable trusts separately. In issuing the new rule, the NCUA said that it believes “that funds held for revocable and irrevocable trusts are sufficiently similar, for the purposes of share insurance coverage, to warrant merging these two categories into one.”
The NCUA is amending §745.4, which currently applies only to revocable trust accounts, to establish a new “trust accounts” category that includes both revocable and irrevocable trust funds (and POD accounts) deposited at a FICU.
The rule defines the funds that will be included in this category as follows:
- Informal revocable trust funds, such as POD accounts, in-trust-for accounts, and “Totten trust” accounts;
- Formal revocable trust funds, meaning funds held pursuant to a written revocable trust agreement under which funds pass to one or more beneficiaries upon the grantor’s death; and
- Irrevocable trust funds, meaning funds held pursuant to an irrevocable trust established by written agreement or by statute.
Insurance coverage for trusts after a grantor dies
In some situations, a revocable trust becomes irrevocable upon the death(s) of the grantor(s). The NCUA regulations currently have special provisions (§745.4(h) & (i)) to address this. They provide that the revocable trust rules may continue to apply to an account where a formal revocable trust becomes irrevocable due to the death of one or more of the trust’s grantors. These provisions were intended to benefit accountholders, who sometimes were unaware that a trust owner’s death could trigger a significant decrease in insurance coverage as a revocable trust becomes irrevocable.
The new rule eliminates these provisions. Instead, the NCUA will insure all three trust types under a single set of rules, simplifying coverage calculations. Accordingly, the death of a formal revocable trust grantor will not result in a decrease in share insurance coverage. Coverage for irrevocable and formal revocable trusts will fall under the same category, and share insurance coverage will remain the same, even after the end of the six-month grace period following the death of an account owner.
Informal revocable trust accounts (like POD accounts) will also be insured under this same trust account category, but they are unlikely to result in the creation of an irrevocable trust account upon an owner or co-owner’s death. As is the case under the existing share insurance rules, when a co-owner of an informal revocable trust account dies, share insurance coverage for the deceased owner’s interest in the account will cease after the six-month grace period allowed for the death of share account owners. After that six-month grace period, share insurance coverage will be calculated as if the deceased co-owner did not exist, and the deceased co-owner’s name did not remain on the account. This treatment of the account will be based on the fact that all funds in the account will be owned by one person (that is, the surviving co-owner).
Calculation of coverage & $1,250,000 maximum
The new rule will use one streamlined calculation to determine the amount of share insurance coverage for funds of both revocable and irrevocable trusts (including POD accounts). The NCUA already uses this method to calculate coverage for revocable trusts that have five or fewer beneficiaries.
The rule will provide that a grantor’s trust funds are insured in an amount up to the standard maximum share insurance amount (SMSIA) – which is currently $250,000 – multiplied by the number of trust beneficiaries, not to exceed five beneficiaries. In other words, maximum coverage will be equivalent to $250,000 per beneficiary for up to five beneficiaries, limiting the coverage for a grantor’s trust funds at each FICU to a total of $1,250,000.
The NCUA will presume that, for share insurance purposes, the trust provides for equal treatment of beneficiaries. It will also consider only beneficiaries who are expected to receive the funds held at the FICU, not beneficiaries who are only expected to receive other, non-deposit assets of the trust.
The calculation rule includes a limit on the total amount of share insurance coverage for all the funds that an accountholder has in the trust category at the same FICU. The rule will provide coverage for trust funds at each FICU up to a total of $1,250,000 per grantor. In other words, each grantor’s insurance limit will be $250,000 per beneficiary up to a maximum of five beneficiaries.
The NCUA said that it “anticipates that limiting coverage to $1,250,000 per grantor, per FICU, for trust funds will not have a substantial effect on accountholders, as most trust accounts in past FICU liquidations have had balances well below this level.”
The level of coverage that applies to trust accounts will no longer be affected by the specific allocation of trust funds to each of the beneficiaries of the trust or by contingencies outlined in the trust agreement.
Accountholders will still need to identify the grantors and the eligible beneficiaries of the trust, and the credit union will need to keep that information in its records, as addressed later in this Compliance Courier.
Aggregation of all three trust types
Under the new rule, the NCUA will aggregate (add together) all informal revocable trusts (like POD accounts), formal revocable trusts, and irrevocable trusts held for the same grantor at the same FICU, and the grantor’s insurance limit will be determined by how many eligible and unique beneficiaries are identified among all of their trust accounts.
The share insurance coverage provided in the “trust accounts” category will still be separate from the coverage provided for other funds held in a different right and capacity at the same FICU.
Presumption of ownership
Under the new rule, unless otherwise specified in a FICU’s account records, the NCUA will presume that funds held in an account for a trust established by multiple grantors are owned in equal shares. This presumption is consistent with the current revocable trust rules.
Eligible beneficiaries
The NCUA only considers “eligible beneficiaries” when calculating share insurance coverage for trust accounts.
Under current rules for revocable trusts, the term “eligible beneficiaries” includes natural persons, charitable organizations, and non-profit entities recognized by the IRS. But the irrevocable trust rules do not set criteria for beneficiaries. Under the new rule, the current “eligible beneficiary” definition will apply to all three types of trusts.
What if an accountholder names their formal trust (revocable or irrevocable) as a POD beneficiary? In that case, the new rule says that the account “will be treated as if titled in the name of the formal trust,” even though that formal trust does not strictly meet the definition of an “eligible beneficiary.” (For The League’s guidance on naming trusts as POD beneficiaries, please see this 2023 Compliance Courier.)
Under the new rule, the NCUA will not count “contingent beneficiaries” when it calculates share insurance coverage for trust accounts. That phrase refers to beneficiaries who are “second in line,” who would get trust assets only if one or more other beneficiaries have died. Only primary, unique beneficiaries will be considered in calculating share insurance coverage.
Contingent beneficiaries are common in insurance policies, but The League has said that Wisconsin’s POD account statutes do not seem to provide for them. (For more information on “contingent beneficiaries” and POD accounts, see this 2019 Compliance Courier.)
Retained interests & ineligible beneficiaries’ interests
Under the NCUA’s current rules, in some cases, funds corresponding to specific beneficiaries are aggregated with a grantor’s single ownership deposits at the same FICU for the purposes of the share insurance calculation. The NCUA has scrapped that complicated approach.
Under the new rule, the trust grantor and other beneficiaries who do not satisfy the definition of “eligible beneficiary” will not be included in the share insurance calculation. The NCUA stressed that this will “not in any way limit a grantor’s ability to establish such trust interests under state law.”
Future trusts named as beneficiaries
Trusts often provide that one or more new trusts will be established when the grantor dies. The new rule clarifies share insurance coverage in these situations.
If a trust agreement provides that trust funds will pass into one or more new trusts upon the death of the grantor(s), the future trust(s) will not be treated as beneficiaries for the purposes of the share insurance coverage calculation. The future trust(s) instead will be treated merely as mechanisms for distributing trust funds, and the people or groups that receive the trust funds through the future trusts will be considered the beneficiaries for the purposes of the share insurance calculation.
Credit union records need to identify POD beneficiaries
The new rule will continue to require the beneficiaries of an informal revocable trust (a POD account) to be expressly named in the account records of the FICU. The NCUA said that it “does not believe this requirement imposes a burden on FICUs, as informal revocable trusts by their nature require the FICU to be able to identify the individuals or entities to which funds would be paid upon the accountholder’s death.”
The requirement to name beneficiaries in the FICU’s account records does not apply to formal revocable trusts; the NCUA generally obtains information on beneficiaries of such trusts from accountholders following a FICU’s liquidation.
Funds covered under other rules
Under the new rule, certain trust funds that are covered by other sections of the share insurance regulations would be excluded from coverage under § 745.4. For example, employee benefit plan accounts are insured under § 745.9-2. In addition, if the co-owners of an informal or formal revocable trust are the trust’s sole beneficiaries, funds held in connection with the trust would be treated as a joint ownership account under § 745.8.
Coverage examples under the new rule
The NCUA gave examples of how its new rule will apply. The examples are not intended to be all-inclusive; they merely address five scenarios involving funds held in trust accounts. The NCUA said that it expects insurance coverage will not change under the rule for most account holders. The examples highlight situations where coverage could be reduced, to ensure the public is aware of them.
- Example 1: Payable-On-Death Account
- Example 2: Formal Revocable Trust and Informal Revocable Trust
- Example 3: Two-Owner Trust and a One-Owner Trust
- Example 4: Revocable and Irrevocable Trusts
- Example 5: Many Beneficiaries Named
Other rule changes related to share insurance
The NCUA’s new rule also provides:
- Consistent share insurance treatment for all mortgage servicing account balances held to satisfy principal and interest obligations to a lender.
- More flexibility for the NCUA to consider various records in determining share insurance coverage in liquidations.
The importance of consulting the NCUA
The League recommends that credit unions should not make representations to members about how much share insurance coverage they have. Instead, it is best to help them navigate the NCUA resources that are designed to help them make that calculation.
- The NCUA’s Share Insurance Estimator lets consumers, credit unions, and their members know how its share insurance rules apply to member share accounts – what’s insured and what portion (if any) exceeds coverage limits.
- The NCUA offers a set of share insurance FAQs, which can help address a variety of topics.
- The NCUA publishes three booklets (in English and Spanish) to help explain share insurance: 1) “Share Insurance Coverage Overview” is a one-page flyer that is easy to follow and highlights the basic share insurance coverage provided by NCUA for various account ownership types. 2) “How Your Accounts Are Federally Insured” is an easy to follow two-page pamphlet that highlights basic share insurance coverage provided by NCUA for various account types. 3) “Your Insured Funds” is a multi-page booklet that provides a more in-depth look at NCUA’s share insurance coverage and includes examples to help you understand the protection provided. All are available to print or download via the NCUA’s website.
- The NCUA has produced videos to help explain share insurance coverage, which are also available via the NCUA’s website.
- The credit union or its members can contact the NCUA’s Office of Consumer Financial Protection, Division of Consumer Access, directly for answers to their share insurance question. Call 1-800-755-1030, Option 1, or email.
The NCUA said that it plans to “update its share insurance estimator and share insurance coverage publications, including publications that provide guidance to FICUs and accountholders” to reflect the new trust accounts rule.