Deposit 101

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Trust Account Tutorial

Overview

Every day new accounts personnel are asked to open accounts that involve some type of trust ownership.  These trust accounts ranges from those with informal “in trust for” features, all the way to formal trust accounts managed by professional trustees.

This tutorial will discuss some of the basics beyond what a trust is, and the specifics of an informal trust.

What is a trust?

A trust can best be viewed as a contract or an agreement between different people. There are essentially three parties to a trust agreement: a grantor, a trustee, and a beneficiary. Each has a role to play in the trust arrangement. The grantor typically is the owner of the assets—and the person who establishes the trust in the first place, and names a trustee and the beneficiaries. The trustee is charged with managing the trust, making sure that the wishes of the grantor are fulfilled. Trustees usually conduct the day-to-day affairs of the trust and manage the trust assets. Often, successor trustees are named, so that there is a line of people in case the first one can't act for some reason. Trust beneficiaries receive the benefit of this trust. That beneficiary may be one person, it may be several persons.

Trust deposit accounts

In the context of a deposit account, sometimes the grantor, or person who creates the trust, is also going to be named as the trustee—and manage the trust for the beneficiaries. And, it’s also possible that the grantor could name himself or herself as the beneficiary of the trust, with other people, or charities, named once the grantor dies. Because the parties to a trust can overlap, it’s important to understand who’s who when dealing with a trust account situation.

In addition to legal and tax issues, many people use trusts as a way to maximize deposit insurance, too. Sophisticated depositors know that if they do it right, they can maximize deposit insurance coverage by using a trust—because trusts are separately insured.

Under both FDIC and NCUA rules, trusts carry a separate line of insurance coverage, distinct from individual or joint accounts. And, depending on the type of trust that is being created, there are different lines of coverage, too. For example, informal, revocable trusts are insured separately from formal irrevocable trusts.

Handling trust accounts can be tricky, so it is important to consider the following:

• Contractual or legal issues. Who is the real owner? Who has authority to open the trust account or transact business?
• Tax issues. Whose number is collected for tax purposes? Who will pay tax on the interest or dividend income?
• Deposit insurance issues. Is the account separately insured? How much money can be in the account before portions of it are uninsured?

Informal trust accounts

Perhaps the most common type of trust account that you can encounter is the informal trust account. They can go by several names such as Totten trusts, “in trust for” accounts (ITF), or “as trustee for” accounts (ATF).

Informal trusts are typically easy to create right at the new accounts desk.  They are often only evidenced by the signature card or account agreement. There is no separate formal agreement between the parties. The owner of the informal trust account is the grantor, and  in most cases is the trustee, too. Essentially, the funds are being informally held for the beneficiaries who are named right on the signature card. Because the account owner sets up this informal trust arrangement, the owner also has the power to change it at any time. That’s why informal trusts are always considered to be revocable in nature. The account owner  has complete control and he or she can decide to remove all beneficiaries named on the account, or change them on a daily basis. Named beneficiaries only get the funds in the account when  owner decides to give it to them, or when the owner dies. If there are multiple owners, then usually all the owners must be deceased before the funds pass to the named beneficiaries.

Documenting informal trust accounts

Because informal trusts are opened on a signature card or other account agreement, documenting the trust arrangement is very important. From an account titling standpoint, state law may dictate the wording.  However titling generally follows something on a long the lines of  Jane Doe in trust for (ITF) Susie Doe or Bobbie Doe.

Because the owner has complete control over the account, he or must pay taxes on any interest income. The owner’s social security number should be used for tax and backup withholding purposes, and the owner must make the required certifications.

Minor Accounts (UTMA/UGMA) Tutorial

Overview

Most new accounts personnel have dealt with depositors who want to open an account for their child.  Often, this accountholder is unsure as to how to structure the account.  All they know is that they want to limit the child’s access to the account until he or she is of “age”.  So how should things be handled?  Can an account be opened for a child without letting the child get at the funds?  Whose tax number should you collect? Should the child sign the account agreement?

This tutorial will attempt to answer these questions and more by reviewing the Uniform Transfers to Minors Act (UTMA) or the Uniform Gifts to Minors Act (UGMA).

What is a UTMA/UGMA account?

The Uniform Gift to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA) provides an alternative for structuring accounts owned by children.  Most states have adopted one form of these uniform acts as a means of transferring ownership of property to children.  Both UTMA and UGMA provide for similar account features.  Essentially, the Acts allow a person to fund an account for a child, but limit that child’s access to the account until the child reaches the age of majority.  The age of majority is set by state law and typically ranges from 18 to 21.

In general terms, an account established pursuant to UTMA or UGMA is a type of custodial account. The child is the account owner, but the parent (or other adult) is named as custodian.  The custodian controls the account until the child is no longer a minor. At that point, the custodial relationship ends and the child controls the account.  

How should UTMA/UGMA accounts be documented?

In order to have a valid UGMA/UTMA account, specific titling standards under state law must be followed.  If the account is titled according to state law, then that particular state statute will govern the account with respect to terms and conditions. Once state law controls, there is no need to contract for the terms specific to UTMA/UGMA accounts.

Generally speaking, UTMA/UGMA accounts are titled as follows:

"(Name of Custodian), as Custodian for (Name of Minor) under the (Name of State) Uniform (Transfers or Gifts) to Minors Act."

Keep in mind, there may be some slight variations on the above titling depending on the wording of your state law.  You may not necessarily have to use the Act's suggestions verbatim, and may instead want to go with a substantively similar variation. For instance, many institutions like to have the minor's name appear first in the title, to match up with the SSN used for interest reporting purposes. Consult with your legal counsel when deciding how your institution will title accounts under UTMA/UGMA.

Should the child sign the account agreement?

There are no hard and fast rules that apply in this situation. The parent or custodian certainly must sign at account opening. The minor, who may be very young or not even present when such an account is opened, need not sign the account agreement.  However, it certainly would not hurt to collect the signature where the minor is old enough to provide it.

If you do collect the minor's signature, keep in mind that the minor may not conduct transactions on the account until after the minor has reached the age of majority and the account has been fully transferred to him or her. 

Ultimately, whether or not to collect the child’s signature is a matter of policy that should be set after consulting with your legal counsel.

Can both parents be custodians on an UTMA /UGMA) account?

Generally, the answer here is no but again you will need to check your state law and verify this. One way for parents to both be named on the account would be to name one parent as custodian and the other as successor custodian.  

What is the maximum contribution allowed for an UTMA account?

There is no maximum contribution under UTMA/UGMA. Accountholders who are concerned about limits on contributions may be confusing UTMA accounts with contribution limits applicable to tax-friendly retirement plans. Be careful that your account holders understand the difference, including the nature of the transfer of ownership to the minor and custodial responsibility they take on when opening this type of account. It may be wise to encourage your customers and members to consult with their own legal and financial advisors before establishing any type of custodial account.

Must a special form be used to open an UTMA/UGMA account?

The answer to this question is no.  The various state laws do not prescribe any type of model form to use when opening an UTMA or UGMA account.  The only real rule is to use the "magic" titling language if you want the Act to apply. Be sure you have reviewed your state law with your counsel and have policies in place to insure that the correct titling is used.

For assistance is opening accounts, be sure to consider our consumer account agreements,  account information sheet and deposit disclosure/account information brochure.

Regulation D Tutorial

In the area of deposit compliance, there are a number of rules and regulations that govern the various types of accounts offered by a financial institution.  However, one law that is particularly important is Regulation D because it forms the foundation for how deposit accounts are structured.

This tutorial will focus on the deposit account definitions contained in Reg D and the categories of accounts that your institution can legally offer.  In addition, this tutorial will discuss the practical impact Reg D has on other areas within your institution.

Regulation D Overview

In a nutshell, Reg D is a law that contains a number of technical definitions.  Although most institutions offer a garden variety of deposit accounts, each account type must fit within a category that is defined and recognized by Reg D.

Under Reg D, there are two general categories of account-types: time deposits and transaction accounts.  The primary distinction between these two categories relates to what are called "reserve requirements."  Reg D requires institutions to set aside a percentage of its funds on deposit and hold them in reserve.  These amounts must then be reported to the federal government.  Under the law, institutions are not required to maintain any reserves on their time deposit accounts.  However, reserves must be maintained on transaction accounts. 

Because the government takes reserve requirements very seriously, it is important to insure that reserve balances are sufficient and that the reports are accurate.  This is the primary reason that distinctions between accounts exist.

A Closer Look at Time Deposits

The time deposit category consists of two types of accounts: certificate accounts, and savings deposits. Each of these accounts has specific characteristics under Reg D.

Definition of Certificate Accounts

The most common example of this type of account is a certificate of deposit or share certificate.  These types of accounts have two basic characteristics:

Stated maturity of least 7 days.  Under Reg D, these accounts must have a 7-day minimum term.  For all practical purposes, the shortest CD your institution could offer is 7 days, or one week.  This is the minimum term any certificate can have in order to qualify as a time deposit.  Your institution may offer an entire product line of CD's with longer maturities such as one month, three months, or a year.  Reg D only establishes the minimum.

Subject to an early withdrawal penalty.  Reg D requires that certificate accounts have a minimum penalty of at least seven days' simple interest if the funds are withdrawn within the first six days of deposit.  Again, your institution may impose penalties that are greater and this is acceptable since Reg D only sets out the minimum requirements.  

Definition of a Savings Deposit
Savings deposits include a variety of account types such as savings accounts, passbook accounts, share accounts, and money market accounts.  Although they are considered time deposits, these accounts contain features that differ from those of the certificate account.

No stated maturity.  Unlike a CD, these accounts do not have a stated maturity date or term.  The account remains active until it is closed by the account holder.

Reservation of written notice before withdrawal.  Under Reg D, these accounts must have contractual language allowing your institution to reserve the right to require seven days' written notice prior to a withdrawal.  The law does not actually require you to impose the notice requirement, but it is something that needs to be included in the account agreement.

Transfer limitations.  Savings deposit account must contain transfer limits.  Under Reg D, withdrawals from a savings deposit must be limited to no more than six per month and of those, no more than three can be by check, draft or debit card.  Reg D requires your institution to have procedures in place designed to monitor depositor activity and prevent excessive withdrawals.

A Closer Look At Transaction Accounts

This category of accounts contains those account types that do not meet the definition of a time deposit.  Under the law, there are two types of accounts here: demand deposit accounts (DDAs) and negotiable Order of Withdrawal (NOW) accounts. Under Reg D, each of these accounts has unique characteristics.

Definition of a Demand Deposit

The demand deposit account has few restrictions and typically takes the form of a checking or a share draft account.

Withdrawable on demand.  As the name implies, the funds in a this type of account may be withdrawn by the depositor on demand.  Because there is no stated maturity date, the account continues until the accountholder closes it.  Finally, there are no withdrawal restrictions. Accountholders can make as many transactions as they choose. 

Banks prohibited from paying interest.  The only real restriction on demand deposits involves the payment of interest—and it only applies to banks.  The rule is that banks may not pay interest on demand deposits.  Credit unions are, however, permitted to pay dividends on their share draft accounts.

Definition of a NOW Account

Another type of transaction account is the negotiable order of withdrawal account, or NOW.  The definition of a NOW account is found in the Code of Federal Regulations (CFR) and only applies to banks. 

Interest may be paid.  Unlike demand deposits, which may not pay interest, NOW accounts may pay interest. 

Reservation of written notice before withdrawal.  Your institution must reserve the right to require seven days' written notice prior to a withdrawal, similar to what we saw with savings deposits.  This language is usually contained in the account agreement.

Unlimited transfers.  NOW accounts allow for unlimited transfers from the account—typically through check writing.

Ownership is restricted.  The ownership of a NOW account must be restricted.  For the most part, only individuals, sole proprietors, and non-profit organizations are eligible to hold a NOW account.  Corporations and for-profit entities are prohibited from opening a NOW account.  Federal law imposes stiff penalties on banks that wrongfully open an interest-bearing checking account for a business, so it is important to follow the ownership rules.

Practical Impact of Reg D

In addition to understanding the technical definitions under Reg D, it is also important to consider the practical impact of the law.  Because Reg D is considered the foundation of deposit compliance, it has an affect that goes beyond how accounts are structured. 

Internal Operations.  Because of reserve requirements, the types of accounts you offer, and the amount of funds on deposit is important.  Reserves must be maintained on transaction accounts and accurately reported to the government. In addition, there is an inter-play between Reg D and your call reports.  Federal examiners require your institution to break down your total deposits into subcategories for call reporting purposes.  Understanding the account types defined in Reg D is a necessary step in keeping your internal operations and federal reporting in compliance.

Other Compliance Laws. The Reg D rules and definitions also impact other areas of deposit compliance.  For example, Regulation CC--the funds availability law--only applies to "transaction accounts" as defined by Reg D.  In addition, compliance with Truth in Savings regulations is affected by Reg D.  This law requires that account disclosure statements describe any account restrictions or limitations.  Since many of the Reg D account definitions include restrictions such as transfer limitations, the Reg D requirements must be explained to fulfill Truth In Savings obligations. Deposit insurance regulations also overlap with the rules in Reg D.  Some of the insurance provisions make distinctions between the various account types, so in order to interpret the rules correctly, you need to understand the Reg D account definitions.

Depositor Relations.  Finally, Reg D can also have an impact on service and overall depositor relations.  When an account is opened, the needs of the depositor will often dictate the type of account that should be opened.  Familiarity with the Reg D requirements will help new accounts personnel select accounts that fit with a depositor's goals.  Furthermore, it is not uncommon for depositors to review the details of their account documentation and question restrictive provisions.  A thorough understanding of Reg D can go along way in answering the tough questions presented by depositors.