Trusts and Membership Qualifications: A Trustee Walks into a Credit Union 2.0
As any other member, trusts are required to qualify for membership by being within a credit union’s field of membership (FOM), paying par value and meeting any other membership requirements a credit union may impose.
In April of last year, I blogged about Trusts and Field of Membership (FOM). At the time, most of the guidance in this area came from NCUA legal opinion letters. Recently, the NAFCU Compliance Team has received a few questions on FOM in the context of trusts after NCUA recently updated the model Federal Credit Union (FCU) Bylaws. With this update, NCUA incorporated into the Bylaws numerous existing legal opinion letters and clarified several provisions. This blog will focus on summarizing the Bylaw provisions related to qualifying a trust for membership in a Federal Credit Union under the provisions now located in the FCU Bylaws.
Qualifying a Trust for Membership Based on Individual Membership
Revocable Trusts. Membership requirements for revocable trusts are met though the settlor, who is the original owner of the funds. Therefore, settlors are required to be a member of the credit union in his or her own right.
The official commentary to Article III of the FCU Bylaws has been expanded to clarify the following:
“…The requirement in the case of revocable trust accounts is simply that the owner of the funds be a member of the FCU. Furthermore, provided the owner of the funds is within the field of membership and eligible for membership, he or she may use the vehicle of the payable-on-death or revocable trust account itself as the method of becoming a member. There is no requirement that the account holder first establish a regular share account to become a member. In accordance with legal opinions issued by the NCUA's Office of General Counsel, an individual may fulfill the requirement of becoming a member by subscribing to the equivalent of the par value of one share, which can be done through the opening of any type of account the credit union offers.”
As you can see, for revocable trusts, it seems settlors are able to satisfy the requirement to become a member of a credit union by using the revocable trust account itself. As the commentary explains, there isn’t a requirement that he or she first establishes a regular share account. Since revocable trusts are fundamentally indistinguishable from the member, “there is no need for the trust to have a separate account number assigned or for it to be viewed as a legal entity separate from the member who set it up.”
Even though revocable trusts must state the name of the beneficiary of the trust, according to the commentary beneficiaries are not required to be members, since they may never in fact come to own the funds or have a right to them. Due to the nature of this type of trust, the individual who establishes the trust is essentially still in control of the funds during his lifetime and can change the designated beneficiary at any time.
Irrevocable Trusts. Membership requirements for irrevocable trusts are met “though either the settlor, who is the original owner of the funds, or the beneficiary, who obtains an equitable, beneficial interest in the funds once the trust is established. So long as one or the other is eligible for membership, the credit union may accept the account.”
The commentary clarifies that as with revocable trusts, the membership obligation for this type of trust can be met through the opening of the trust account itself. Thus, the settlor or the beneficiary is not required to previously establish a separate, regular share account. When it comes to monthly statements and year-end tax reporting, even though credit unions typically deal with the trustee (most irrevocable trusts have a trustee who has administrative responsibility for the account), trustees are not required to be a member of the credit union. The commentary explains credit unions “need not necessarily view the trust account as a separate legal entity, with its own separate tax ID number. Instead, it need only verify and confirm the eligibility of either the settlor or the beneficiary or all of the settlors or all of the beneficiaries to join the credit union” in the case of multiple parties.
Irrevocable trust must also state the name of the beneficiary of the trust.
Qualifying a Trust for Membership as an Organization of Such Persons
In NCUA Legal Opinion Letter 99-1110, the agency said an organization of such persons means “an organization composed exclusively of persons who are within the FCU's FOM.”
Article III, Section 6 explains “a trust may be a member of a credit union as an entity if all parties to the trust, including all settlors, beneficiaries and trustees, are within the credit union's field of membership.”
The commentary clarifies that if this is the case, then “the trust will qualify as an organization of such persons, which is a standard clause in FCU fields of membership.” This applies to both revocable and irrevocable trusts.
Although adoption of all or part of the updated bylaws is entirely at a credit union’s option, NCUA has said provisions contained in the model FCU Bylaws -even when not adopted- are considered best practices for credit unions to follow. Credit unions may want to compare their current bylaws, as well as their account opening policies and procedures, with the provisions in the current model FCU Bylaws to evaluate and determine if they should be updated.