A Trustee Walks into a Credit Union: Trusts and Field of Membership
Written by Alma Calcano, Regulatory Compliance Specialist, NAFCU
Hello again compliance friends!
The past couple of weeks we have received a few questions on Field of Membership (FOM) and Federal Credit Unions (FCUs), specifically, in the context of trusts. Similar to any other member, trusts are required to qualify for membership by being within a credit union’s FOM, paying par value and meeting any other membership requirements the credit union may impose.
Qualifying a Trust for Membership
Both revocable and irrevocable trusts are eligible for membership with credit unions. Guidance in this area comes from opinion letters issued by NCUA explaining how trusts can qualify for membership at an FCU. Basically, there are two options.
Option 1: Trust Falls Within the Field of Membership
First, NCUA explains that trusts are eligible for membership in an FCU “if it is specifically named in the FCU's field of membership or as an "organization of such persons" if the FCU has opted to include organizations of such persons in its FOM”. An organization of such “persons” means an organization composed exclusively of persons who are within the FCU's FOM. For trusts, those persons would be the settlors, trustees, and beneficiaries of the trust.” See, NCUA’s Legal Opinion Letter 99-1110. The credit union will need to review Section 5 of its charter to determine whether a trust is specifically named or if the charter includes organizations of such persons.
Keep in mind, under the organization of such persons rule, whether a particular trust is eligible for membership will depend on whether all parties to the trust, including all settlors, beneficiaries and trustees, are within the field of membership. If they are, then the trust itself can be a member of your credit union. Therefore, your credit union may need to determine this on a case-by-case basis.
In previous guidance, NCUA had said only irrevocable trusts could qualify for membership as an organization of such persons. In Legal Opinion Letter 99-1110 NCUA recognized that similar to irrevocable trusts, revocable trusts are also operative upon their formation, and, although revocable trusts may be revoked, for membership eligibility purposes revocable and irrevocable trusts are to be treated the same. Accordingly, revocable and irrevocable trusts could qualify for membership under the conditions discussed above.
Option 2: Trust Account Is Opened Based on Individual Membership(s)
So what happens if a trust is not listed in the FOM and it does not qualify for membership as an organization of such persons? Then the second option comes into place and the trust must qualify based on the membership of those involved in the trust.
Article III, Section 6 of NCUA’s FCU bylaws state that “[w]hen shares are issued in a revocable trust, the settlor must be a member of th[e] credit union in his or her own right.” See also, NCUA’s Legal Opinion Letters 97-0539 & 96-0804. While NCUA’s Legal Opinion Letter 92-0224 explains "either the settlor or the beneficiary must be a member of the credit union before an irrevocable trust account can be created.” If there are two or more settlors or beneficiaries, then either all the settlors or all the beneficiaries are required to be members of the credit union. For NCUA membership of the trustee is irrelevant in this case.
As you can see, trusts qualify for membership slightly differently in each case. Regardless of the option your credit union falls under, the credit union may need to determine a trust’s eligibility for membership on a case-by-case basis.
Trusts and Share Insurance Coverage
Certain recordkeeping requirements must be met in order for trust accounts to be insured. In its guidance NCUA has said “the credit union's records must indicate the name of both the settlor and the trustee of the trust and must contain an account signature card executed by the trustee indicating the fiduciary capacity of the trustee. In addition, the interests of the beneficiaries under the trust must be ascertainable from the records of either the credit union or the trustee, and the settlor or beneficiary must be a member of the credit union. Thus, if the account is an irrevocable trust account, either the credit union or the trustee must maintain records of beneficiary interests.” See, NCUA’s Legal Opinion Letter 92-0224.
If the account is a revocable trust, the beneficiaries must be specifically named in the account records of the insured credit union. See, 12 CFR §745.4 (b). Moreover, if only the trustee is a member of the credit union, then the account would be ineligible for share insurance coverage. See, NCUA’s Legal Opinion Letter 96-0804. Additional information on how trust accounts are insured along with some useful examples are provided in 12 C.F.R. Part 745, Appendix G, Section E. Also, you may find NCUA’s Share Insurance Estimator useful when calculating Share Insurance Coverage.
Do you know what is the option applicable to your credit union? If you don’t, this might be a good time to review your credit union’s charter as well as its Account Opening and Customer Identification Procedures to determine whether an update is appropriate.
That’s all for now, until our next blog!
Register for our upcoming compliance webinars!
April 23: Redesigned URLA