by John Darer CLU ChFC MSSC RSP CLTC
Are qualified settlement funds under IRC 468B (sometimes referred to colloquially as "qualified settlement trusts") covered by the FDIC*?
It's a great question when one looks at overall usage of qualified settlement funds in the settlement of mass tort cases, class action lawsuit settlements and other settlements involving large sums of money. First a little bit of background.
Treas. Reg. § 1.468B-1(a) defines a qualified settlement fund as “a fund, account, or trust that satisfies the requirements of paragraph (c) of this section.” Treas. Reg. § 1.468b-1(c) provides as follows:
(c) Requirements. A fund, account, or trust satisfies the requirements of this paragraph (c) if –
(1) It is established pursuant to an order of, or is approved by, the United States, any state (including the District of Columbia), territory, possession, or political subdivision thereof, or any agency or instrumentality (including a court of law) of any of the foregoing and is subject to the continuing jurisdiction of that governmental authority;
(2) It is established to resolve or satisfy one or more contested or uncontested claims that have resulted or may result from an event (or related series of events) that has occurred and that has given rise to at least one claim asserting liability –
(i) Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (hereinafter referred to as CERCLA), as amended, 42 U.S.C. 9601 et seq.; or
(ii) Arising out of a tort, breach of contract, or violation of law; or
(iii) Designated by the Commissioner in a revenue ruling or revenue procedure; and
(3) The fund, account, or trust is a trust under applicable state law, or its assets are otherwise segregated from other assets of the transferor (and related persons).
B. Recent Developments Concerning the Federal Deposit Insurance Corporation (FDIC)
On November 9, 2010, the FDIC issued a Final Rule implementing section 343 of the Dodd-Frank Wall Street Reform and Consumer Protection Act that provides for unlimited insurance coverage of noninterest-bearing transaction accounts. Beginning December 31, 2010, through December 31, 2012, all noninterest-bearing transaction accounts are fully insured, regardless of the balance of the account, at all FDIC-insured institutions. The unlimited insurance coverage is available to all depositors, including consumers, businesses, and government entities. This unlimited insurance coverage is separate from, and in addition to, the insurance coverage provided to a depositor’s other deposit accounts held at an FDIC-insured institution.
A noninterest-bearing transaction account is a deposit account where interest is neither accrued nor paid; depositors are permitted to make an unlimited number of transfers and withdrawals; and the bank does not reserve the right to require advance notice of an intended withdrawal.
(Please note that a Qualified Settlement Fund, particularly on cases involving one ( or only a few) claimants may be promoted to lawyers, by settlement planners, with the notion that the interest earned will cover the trustee or administration fees.)
On July 21, 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into law, which, in part, permanently raises the current standard maximum deposit insurance amount (SMDIA) to $250,000. The FDIC insurance coverage limit applies per depositor, per insured depository institution for each account ownership category. Consumers and bankers can find additional information regarding FDIC’s deposit insurance coverage through the use of the FDIC’s Electronic Deposit Insurance Estimator (EDIE) and deposit insurance publications located on the FDIC’s website.
- Based on reading the above the answer is obviously dependent on the type of account set up
- FDIC insurance DOES NOT cover any negligence or malfeasance by the qualified settlement fund trustee or qualified settlement fund adminstrator.
- Clearly there is an obligation on the trustee or administrator to protect the funds.
Let's get into a little more detail...
Recognition of Fiduciary Relationships
Sylvius H. Von Saucken, who acts as a fiduciary for Qualified Settlement Funds for the Garretson Resoluton Group in Cincinnati (and who happens to be a reader of this blog!), was especially helpful in sharing his firm's research on this issue.
"Section 330.7 of the FDIC’s regulations expressly addresses accounts held by an agent, nominee, guardian, custodian, or conservator. 12 C.F.R. § 330.7. Under these rules, funds owned by a principal or principals and deposited into one or more deposit accounts in the name of an agent, custodian, or nominee, “shall be insured to the same extent as if deposited in the name of the principal(s).” 12 C.F.R. § 330.7(a). The FDIC looks to the titling of an account held as a QSF to determine that the fund is the name of a fiduciary, whether as administrator, trustee, or otherwise.
The FDIC will recognize a claim for deposit insurance coverage based on a fiduciary relationship only if that relationship is expressly disclosed, by way of specific references in the deposit account records of the insured depository institution. 12 C.F.R. § 330.5(b)(1). Such relationships include, but are not limited to, “relationships involving a trustee, agent, nominee, guardian, executor or custodian pursuant to which the funds are deposited.” Although this provision does not list “administrator,” the list in the regulations is not exclusive.
Assuming the deposit account records of the custodian which is holding the funds on behalf of the QSF administrator/trustee disclose the existence of a relationship which may provide a basis for additional insurance, the details of the relationship and the interests of other parties in the account still must be ascertainable either from the deposit account records of the custodian (bank or financial institution) or from records maintained in good faith and in the regular course of business by the depositor or by “some person or entity that has undertaken to maintain such records for the depositor.” 12 C.F.R. § 330.5(b)(2). The key then is to maintain records that reflect the name and taxpayer identification number for each claimant to the fund. Moreover, being able to identify an exact dollar amount that each individual claimant is entitled to receive through settlement will be further proof of the identifiable interest prong of the rules".
In summary the answer turns on the FDIC’s recognition of a fiduciary relationship and the ability to prove that each claimant has an identifiable interest in the fund.