Share Insurance 101

1. Share Insurance 101 Expanded PowerPoint Slides From October 7, 2008 Webinar Hosted by: NCUA Board Member Gigi Hyland

2. Presenters

4. Agenda • Legal and Regulatory Requirements • Operational Considerations • Questions and Answers

5. Legal and Regulatory Environment Staff Attorney Frank Kressman Office of General Counsel

6. Legal and Regulatory Environment • The enabling legislation is Title II of the Federal Credit Union Act. • Title II authorizes the NCUA Board to insure member accounts. • The NCUA Board implements its authority to insure member accounts through Part 745 of the NCUA Rules and Regulations. • The Emergency Economic Stabilization Act temporarily increases insured limits from $100,000 to $250,000 (to December 31, 2009).

7. Key Fundamental of Share Insurance Coverage #1 Rules apply to persons who are members or otherwise eligible to maintain an insured account at a federally insured credit union, such as a nonmember joint owner with right of survivorship.

8. Key Fundamental of Share Insurance Coverage #2 The coverage limits we will discuss apply to relationships members have with individual credit unions. If a member belongs to more than one federally insured credit union, separate coverage exists at each credit union. • Different branches of the same credit union are NOT considered separate credit unions.

9. Key Fundamental of Share Insurance Coverage #3 For more complex arrangements, proper structuring is imperative. For more complex arrangements with more than one person holding an account, such as a joint account or trust account, the rules assume the people benefiting from the coverage have equal interests in the accounts unless otherwise documented.

10. SMSIA Defined in Regulation • NCUA’s insurance coverage is based on “SMSIA” which stands for: “Standard Maximum Share Insurance Amount.” • As of April 2006 - SMSIA is: • $100,000 for most types of accounts; and • $250,000 for certain types of retirement accounts. • Beginning October 3, 2008: • Temporary increase for all accounts to $250,000 .

11. Types of Insured Accounts

12. Individual Accounts or Single Ownership Accounts • Funds deposited in a member’s individual name have coverage of $250,000 in the aggregate. • This type of coverage combines the funds held in an individual’s name, regardless of the number of different types of accounts held.

13. Individual Accounts or Single Ownership Accounts • Includes funds owned by a principal and held by agents or nominees (not to be confused with trust accounts), as well as custodial loan accounts (i.e., escrow accounts).

14. Individual Accounts or Single Ownership Accounts • Separate coverage of $250,000 for individual accounts held by a guardian, custodian, or conservator for the benefit of a ward or minor under the Uniform Gifts to Minors Act and held in the name of the guardian, custodian, or conservator.

15. Joint Accounts or Joint Ownership Accounts • Accounts established as qualifying joint accounts have $250,000 of separate insurance coverage from individual accounts and other types of accounts. • Each member is insured up to $250,000 for all his/her interests in all joint accounts in the same insured credit union.

16. Joint Accounts or Joint Ownership Accounts • Qualifying joint accounts have the following characteristics: 1) Each of the co-owners has signed a membership/account signature card; and 2) Each co-owner has a right of withdrawal on the same basis as the other co-owners.

17. Joint Accounts or Joint Ownership Accounts • Coverage available to members and non-member joint owners. • Cannot change the amount of coverage available with different ownership combinations, or order of owners’ names. • The basis for the coverage is each member’s total interests in all joint accounts.

18. Joint Accounts or Joint Ownership Accounts • The share insurance rule combines funds in non-qualifying joint accounts with individual accounts and single ownership (i.e., individual) account coverage rules apply. • Examples of non-qualifying joint accounts include accounts where: 1) Each of the co-owners has not signed a membership/account signature card; and 2) Each co-owner does not have a right of withdrawal on the same basis as the other co-owners.

19. Separate coverage of $250,000 available for the vested ascertainable interest of a participant or designated beneficiary in a trust or custodial account maintained pursuant to a pension or profit-sharing plan such as a valid Keogh, IRA, or Roth IRA. IRA/Keogh Accounts

20. Internal Revenue Code provides rules for structuring such accounts. • Interests in IRAs and Roth IRAs combined for the purpose of this coverage. • Keogh accounts have up to $250,000 in separate coverage from that offered for IRAs/Roth IRAs. IRA/Keogh Accounts

21. Insurance Implications of Complex AccountArrangements

22. Funds of a decedent held in the name of the decedent or in the name of an executor or administrator of an estate have separate coverage of $250,000 from that of the individual accounts of the executor, administrator, or beneficiaries of the estate. Accounts Held by Executors or Administrators

23. Accounts of a corporation, partnership, or unincorporated association engaged in an independent activity have coverage of $250,000 in the aggregate. • “Independent activity” means the activity does not have the sole purpose of increasing insurance coverage. • Sole proprietorships are not eligible for business account coverage but rather are covered as individual accounts. Business Accounts

24. Revocable Trust Accounts • Must display intent of an owner to pass on funds to a named beneficiary upon his or her death. • Includes testamentary account, tentative or “Totten” trust account, “payable-on-death” account, or similar account that evidences intent to pass on funds. • Simple POD accounts do not require formal trust documents. Revocable Trust Accounts

25. Revocable trust accounts also include “living trusts” - formal written trust documents - that an owner creates and maintains control over during his or her lifetime for a qualifying beneficiary or beneficiaries. Revocable Trust Accounts

26. OLD RULE • Must display intent of an owner to pass on funds to a named beneficiary upon his or her death. • Payable-on-death (POD) or Living Trusts. • Qualifying beneficiaries: • Spouse, child, parent, grandchild, brother, or sister • Insurance for account owner = $100,000 per beneficiary Revocable Trust Accounts

27. NEW RULE Interim final rule with 60 day comment period Effective date: October 3, 2008 • Concept of qualifying beneficiaries abandoned. • NEW definition of beneficiary – owner may name any natural person as well as charitable organizations and other non-profit entities. • Equal or greater coverage than old rule. • Revocable trusts converted to irrevocable trusts still insured as revocable trusts. Revocable Trust Accounts

28. NEW RULE - Limitations • Limitations: • A trust account with up to 5 beneficiaries will be insured up to $250,000 per beneficiary regardless of each beneficiary’s proportional interest. • For example: • A member has only one revocable trust account in a credit union with 4 beneficiaries named in the trust. The maximum insurance coverage would be $1 million (4 x $250,000) regardless of each beneficiary’s proportional interest. Revocable Trust Accounts

29. NEW RULE - Limitations • A trust account with more than 5 beneficiaries AND more than $1,250,000 will be insured for the greater of EITHER: • $1,250,000 OR • the aggregate of all beneficiaries’ proportional interests in the trust, limited to $250,000 per beneficiary. Revocable Trust Accounts

30. NEW RULE - Limitations For Example: • Adam has a living trust account with a balance of $1,500,000. Under the terms of the trust, upon Adam’s death, Adam’s three children are each entitled to $125,000, Adam’s friend is entitled to $12,500 and a designated charity is entitled to $175,000. The trust also provides that the remainder of the trust assets shall belong to Adam’s spouse… Revocable Trust Accounts

31. …In this case, because the balance of the account is over $1,250,000, which is five times the current SMSIA of $250,000, and there are more than five different beneficiaries named in the trust, the maximum coverage available to Adam would be the greater of: $1,250,000 or the aggregate of each different beneficiary’s interest to a limit of $250,000 per beneficiary…. Revocable Trust Accounts

32. …The beneficial interests in the trust considered for purposes of determining coverage are: $125,000 for each of the children (totaling $375,000), $12,500 for the friend, $175,000 for the charity, and $250,000 for the spouse. • The spouse’s remainder interest was actually $937,500, but under these circumstances, the rule limits each beneficiary’s interests to $250,000 per beneficiary, and therefore she will only receive $250,000 in coverage for Adam. • The aggregate of each beneficiary’s beneficial interest, thus, is $812,500. • Hence, the maximum coverage afforded to the account owner would be $1,250,000, the greater of $1,250,000 or $812,500. Revocable Trust Accounts

33. The new rule was written before the legislation went into effect that raised insurance from $100,000 to $250,000. • The interim final rule that is posted on the NCUA website, therefore, uses $100,000 throughout. • The interim final rule is still effective at the $250,000 limit. Revocable Trust Accounts

34. Remember that in reality right now your coverage is $250,000. Here is the same example as before but with simpler numbers. We are only providing this example for practice/understanding purposes. • If the SMISA reverts back to $100,000 and assuming Adam’s revocable trust had a balance of $600,000, the following logic for determining coverage would apply: • Maximum coverage available to Adam would be the greater of: $500,000 OR the aggregate of each different beneficiary’s interest to a limit of $100,000 per beneficiary. • Adam’s Account Balance: $600,000. • Upon his death, he has named 6 beneficiaries: • Each of three children is entitled to $50,000 (total of $150,000). • Friend is entitled to $5,000. • Charity is entitled to $70,000. • Spouse is entitled to the remainder: $375,000. • You will discover in this case that the aggregate of each beneficiary’s interests is $325,000 (since the spouse is limited to $100,000 limit). • The coverage on the account will be $500,000 because that amount is greater than the aggregate of each beneficiaries interests which is $325,000. Revocable Trust Accounts

35. All trust interests for the same beneficiary, established through a valid irrevocable trust arrangement, have separate aggregate coverage of $250,000. • This coverage includes Coverdell Education Savings Accounts, formerly Education IRAs. Irrevocable Trust Accounts

36. Grace Period for Certain Events • NCUA allows a six-month grace period for two events that could otherwise limit insurance coverage: 1) The death of a member (account owners, not beneficiaries); or 2) The merger of an insured credit union.

37. Legal and Regulatory Summary • Different kinds of coverage for different kinds of accounts • Each account can only be one kind of account at any given time • With proper structuring, you should be able to insure almost all of your members’ share accounts • Additional questions? • http://www.ncua.gov • Contact your region • NCUA Office of General Counsel: (703) 518-6540

38. Share Insurance Operational Issues Program Officer Robert Leonard Office of Examination and Insurance

39. Share Insurance Operational Issues

40. National Growth inCredit Union Movement SinceShare Insurance Became Available

41. Members also continue to view credit unions as a source for safe investments

42. Share Insurance Operational Issues

43. Share Insurance Operational Issues • Share insurance issues affect two primary areas of risk your examiner evaluates:

44. Reputation Risk Share Insurance Operational Issues Members are more likely to use their credit unions for a broader spectrum of services when they have greater confidence in their insurance coverage.

45. Reputation Risk • How your examiner will assess reputation risk: • Observations of member service • General office environment • e.g. availability of brochures/resources • Trends with share activity • Trends with member complaints

46. Share Insurance Operational Issues Compliance Risk Adequate controls are imperative for management when fulfilling its responsibility for accurately reporting insured shares on Call Reports.

47. Compliance Risk • How your examiner will assess compliance risk: • General record keeping controls • Involvement of Supervisory Committee/internal audit staff • Review of Call Report accuracy • Review of vendor relationship management (i.e. data processors)

48. For More Information • Part 745 of the NCUA Rules and Regulations is available at: http://www.ncua.gov/regulationsopinionslaws/ • “Your Insured Funds” publication available in English and Spanish. • NCUA’s Internet site also offers an on-line Insurance Estimator (currently being updated to reflect recent changes).

49. For More Information • We have consolidated the resources into a Share Insurance Tool Kit available online at: http://www.ncua.gov/ShareInsurance/ • Consumer Assistance Center: 800-755-1030 • Press 1 for Share Insurance questions • For specific complex questions, write to your Regional Office. Contact information located on: http://www.ncua.gov/aboutncua/ncua_directory.html

50. Screenshot of Tool Kit