The Circle of Life: Federal Considerations for Member Decedents
Hello Compliance Friends! Over the holidays, I had a chance to relax, travel and check out some old and new films. One of my favorite movies will forever be Disney's The Lion King. The death of Mufasa will forever pull at my six-year old heart strings. Today's blog will talk about what to do when Mufasa Member finds himself in a wildebeest stampede and the circle of life suddenly closes.
As compliance practitioners, I am sure that you are aware a lot of these issues would need to be discussed with your local counsel because they directly involve state law issues. However, I have highlighted some NCUA specific and federal law issues that may serve as helpful reminders. I have segmented this post according to subject areas for your convenience.
The FCU Model Bylaws contain the following provision with regard to keeping a deceased member's account open. You may want to review your credit union's bylaws for a similar provision.
The share account of a deceased member (other than one held in joint tenancy with another member) may be continued until the close of the dividend period in which the administration of the deceased's estate is completed. 12 CFR 701, App. A.
The bylaws do not address closing an account and re-opening a new one. On the other hand, an account held in joint tenancy can remain open. If it is determined that the joint tenant is not a member in his/her own right but within the credit union's field of membership, then the person would need to become a member so that the credit union would not impermissibly be offering services to a nonmember. Note, insurance may end six months after death of a member unless the account is restructured.
Moreover, after a member dies, the credit union still has the responsibility to protect member funds and information. To begin, under many states' laws, absent a named beneficiary, the funds of the account are a part of the deceased member's estate. Therefore, a credit union may need to avoid releasing the funds until the qualified representative of the estate has been named by a court or according to the applicable state's probate laws.
Account information is considered non-public personal information and therefore cannot be disclosed without providing an opt-out notice, unless the disclosure falls under one of the exceptions. Note, non-public personal information may be disclosed to a person holding a legal or beneficial interest relating to the member, and to persons acting in a fiduciary or representative capacity on behalf of the member.
Lastly, before closing a member account, the credit union may want to proceed with caution. Depending on its respective policy, the credit union may want to flag on the account that the owner has died, and then allow a period of time for any surviving owners or the member's estate to take ownership of the matter. The documents needed to close an account will depend on state law, the account agreement and the credit union's internal policies and procedures.
To begin, one concern from a federal perspective is that having continued tax reporting of a member's social security number after the person's death can cause tax complications. Although, this may not always be possible if Mufasa Member dies later in the tax year. IRS Publication 559 contains an overview of issues involving deceased persons, and while aimed at executors of estates, has some helpful information about Form 1099.
In addition, the credit union should note that a discharge of indebtedness under a settlement agreement between a credit union and a debtor or a debtor's estate is an "identifiable event" that triggers the obligation to file Form 1099-C. The instructions for Form 1099-C may be accessed here.
With regard to credit, the credit union's options would be determined by state law, the loan agreement, and the specific situation. Often, if the decedent was the only borrower, the credit union could be looking at making a claim against the estate. Even though someone may be making loan payments, unless they are contractually obligated to make those payments, the credit union may want to see if an estate has been established (or if there is some other claim that should be made, for example, if the member had life and disability insurance under which a claim could be made). Absent a will, state law will determine the disposition of the decedent's assets to heirs, including vehicles and real property. Often, heirs have to decide if they want to keep an asset (and likely refinance the loan), or if they want to sell the asset to pay off the credit union's loan, etc.
In regards to mortgage loans, a lot of mortgages include due-on-sale clauses which allow the lender to call the loan upon the death of the borrower; however, there are situations in which a due-on-sale clause cannot be exercised; for example, if the property is transferred under joint tenancy.
This is the section of NCUA's rules and regulations that references due-on-sales clauses. Note the general prohibition on exercising a due-on-sales clause where property is transferred on the death of a joint tenant or tenant in the entirety, or transferred to a spouse or children, as discussed in 12 CFR 701.21(g)(6). Overall, this is a fact specific analysis that the credit union may want to review with local counsel.
There is a rule that Social Security benefits are not paid for the month that Mufasa Member dies. Here is the Social Security Regulation:
(a) §404.311 When does my entitlement to old-age benefits begin and end?
(b) We will find your entitlement to old-age benefits ends with the month before the month you die.
This seems unfair and actually legislation has been introduced in the past on this topic but the way the rule is written, even if a member dies on the last day of a month, the member is not entitled to Social Security benefits for that entire month. Here is an excerpt from a Social Security guide:
"If the deceased was receiving Social Security benefits, you must return the benefit received for the month of death or any later months. For example, if the person dies in July, you must return the benefit paid in August. If benefits were paid by direct deposit, contact the bank or other financial institution. Request that any funds received for the month of death or later be returned to Social Security. If the benefits were paid by check, do not cash any checks received for the month in which the person dies or later. Return the checks to Social Security as soon as possible. However, eligible family members may be able to receive death benefits for the month in which the beneficiary died."
There is guidance with regards to check reclamations specifically. The Social Security Program Operations Manual has a section on electronic funds transfer reclamations and a section on check reclamations.
The Department of Treasury's Green Book also addresses check reclamations more specifically including how to reply to a "Notice of Reclamation" and when there may be a right to protest.
As I previously mentioned, when the circle of life closes on a member, there are numerous state law issues that are implicated, and a credit union will need to consult with local counsel to determine how best to draft and modify its policies. However, there are some NCUA and federal law issues that are implicated when a member dies, and credit unions will need to maintain policies that strike a balance between state law, federal regulations, and the business needs of the credit union.
Editor's Note: As helpful insight from a blog reader, I added information about NCUA's 6-month grace period for decedent accounts. I modified this post on Friday, January 19, 2018 to provide a more through legal analysis and to be a more complete resource for NAFCU's members.