Notice 2017-4

The Wisconsin Uniform Transfers to Minors Act is set forth in chapter 54 of the Wisconsin Statutes. Specifically, Wis. Stats. § 54.854 – 54.898. Collectively, these provisions govern Wisconsin’s Uniform Transfers to Minors Act accounts (WUTMA accounts). WUTMA accounts enable financial institutions to open accounts, with a custodian, to hold funds gifted or otherwise transferred to a minor, for the benefit of a minor.

Creating a WUTMA Account

Wis. Stat. § 54.870 outlines the manner of creating custodial property and effecting transfer, the designation of an initial custodian, and control of a WUTMA account. An instrument in the following form creates and transfers custodial property: 

I, …. (name of transferor or name and representative capacity if a fiduciary) hereby transfer to …. (name of custodian), as custodian for …. (name of minor) under the Wisconsin Uniform Transfers to Minors Act, the following: …. (insert a description of the custodial property sufficient to identify it).

Dated: ….

….

(Signature)

…. (name of custodian) acknowledges receipt of the property described above, as custodian for the minor named above under the Wisconsin Uniform Transfers to Minors Act.

Dated: ….

….

(Signature of Custodian)

In establishing a WUTMA account a financial institution is contracting with a custodian, who has the right to receive the property for the minor beneficiary. A transferor, as defined in Wis. Stat. § 54.854(14), may revocably nominate a custodian to receive the property for a minor by naming the custodian, followed in substance by the words: “as custodian for …. (name of minor) under the Wisconsin Uniform Transfers to Minors Act.” The nomination may name one or more persons as substitute custodians to whom the property must be transferred, in the order named, if the first nominated custodian dies before the transfer or is unable, declines or is ineligible to serve. The nomination may be made in a will, a trust, a deed, an instrument exercising a power of appointment or a writing designating a beneficiary of contractual rights which is registered with or delivered to the payor, issuer or other obligor of the contractual rights. Wis. Stat. § 54.858(1).

The nomination of a custodian under this section does not create custodial property until the nominating instrument becomes irrevocable or a transfer to the nominated custodian is completed under Wis. Stat. § 54.870. Upon the creation of custodial property or the transfer to the nominated custodian is complete, the custodian has management and control of the WUTMA account.

Protection of Financial Institutions

While the WUTMA statutes outline the various powers and duties of a custodian, financial institutions are protected from liability, when certain criteria are met. Wis. Stat. § 54.884 outlines the exemption of third parties from liability. It provides that a 3rd person, in good faith and without court order, may act on the instructions of or otherwise deal with any person purporting to make a transfer or purporting to act in the capacity of a custodian and, in the absence of knowledge, is not responsible for determining any of the following: (1) The validity of the purported custodian’s designation; (2) The propriety of, or the authority under the Uniform Transfer to Minors Act for, any act of the purported custodian; (3) The validity or propriety under Uniform Transfer to Minors Act of any instrument or instructions executed or given either by the person purporting to make a transfer or by the purported custodian; (4) The propriety of the application of any property of the minor delivered to the purported custodian.

Selected Relevant WUTMA Provisions

Overall, the WUTMA statutes outline the intricacies of WUTMA accounts. Some provisions within chapter 54 have a direct impact on financial institutions and implicitly dictate how financial institutions should handle WUTMA accounts. Below, find examples of how some of these provisions impact financial institutions.

Wis. Stat. § 54.860 states: A person may make a transfer by irrevocable gift to, or the irrevocable exercise of a power of appointment in favor of, a custodian for the benefit of a minor under Wis. Stat. § 54.870. This provision highlights an important characteristic of a WUTMA account that financial institutions must be aware of. That is, the custodian, not the minor, is with whom the financial institution is contracting. While the property technically belongs to the minor, it is in the control of the custodian for the benefit of the minor. So, an institution should carefully consider whether to give information to an inquiring minor. It may be best for a minor to discuss balances with the custodian. If a minor believes funds are being used inappropriately, the minor could petition the court.

The termination of a WUTMA custodianship depends upon the type of gift or transfer made to the custodian for the benefit of the minor. Wis. Stat. §54.892 states that the custodian must transfer, in an appropriate manner, the custodial property to the minor or the minor’s estate upon the earlier of: (1) the minor’s attainment of 21 years of age with respect to property transferred by gift under 54. 860, or under a provision in a will or trust under 54.862; (2) the minor’s attainment of 18 years of age for property transferred by certain other fiduciaries under 54.864 or obligors under 54.866; or (3) upon the minor’s death. While most WUTMA custodianships will terminate upon the minor reaching the age of 21, it is up to the custodian rather than the institution to make this determination.Regardless of his or her age, if the named minor on a WUTMA account asserts that he or she is entitled to access funds on deposit, the named minor should be directed to the custodian to discuss this matter, or to the court if named minor believes that the custodian is acting improperly.

Wis. Stat. § 54.892 states that upon a minor’s death, the custodian shall transfer, in an appropriate manner, the custodial property to the minor’s estate. Such a provision means that Payable on Death beneficiary designations are not allowed on WUTMA accounts.

Questions and Answers

As WUTMA accounts have unique qualities, it is understandable that such accounts may lead to questions about how WUTMA accounts may impact decisions at your financial institution.  Below, please find common questions from financial institutions regarding WUTMA accounts.

Q1: Can a minor deposit their paycheck in a WUTMA account?

A1:  No. A minor’s paycheck should not be deposited in a WUTMA account, as it does not constitute a gift or transfer. Only funds that are gifts or transfers may be deposited to a WUTMA accounts.

Additionally, the WUTMA account is managed and controlled by the custodian. Consequently, the minor will not have access to the deposited funds. Allowing a minor to deposit non-WUTMA funds in to a WUTMA account may lead to unnecessary disputes and complaints.

Q2: If a minor cannot deposit their paychecks in a WUTMA account, what account should my financial institution open?

A2: While an institution is generally free to contract with whomever it wishes, a risk in contracting with a minor alone is that a minor can void most contracts into which they have entered, by raising a defense of incapacity to contract based upon their age. Thus, if an individual account is opened with only the minor, and the minor raises this defense, the bank would not be able to recoup, for example, any fees or charges, etc., assessed to the account. To avoid this situation, an institution should consider requiring a joint account, with joint and several liability, be opened between the minor and a parent, guardian or other individual who has reached the age of majority. If the minor raises the defense, in this type of account, the contract will remain valid with respect to the remaining party, and such party will still be liable for all fees and charges assessed on the account even if such fees and charges are attributable to the minor’s activity on the account. Of course, an institution may also wish to consult with its own legal counsel regarding the risks and benefits of other accounts the institution may offer.

Q3: If a custodian dies but did not appoint a successor custodian, does a parent automatically become the new custodian?

A3: No. As stated in Wis. Stat. § 54.888(4), if a custodian is ineligible, dies or becomes incapacitated without having effectively designated a successor and the minor has attained the age of 14 years, the minor may designate as successor custodian, an adult member of the minor’s family, a conservator of the minor, as defined in Wis. Stat. § 54.01(3), or a trust company. If the minor has not attained the age of 14 years or fails to act within 60 days after the ineligibility, death or incapacity, the conservator of the minor becomes successor custodian. If the minor has no conservator or the conservator declines to act, the transferor, the legal representative of the transferor or the custodian, an adult member of the minor’s family or any other interested person may petition the court to designate a successor custodian.

So, a minor, who has reached the age of 14, may designate a new custodian, within 60 days, by executing and dating an instrument of designation before a subscribing witness other than the successor. If beyond 60 days, the minor’s parent, or other person, as noted above, may petition the court to become the custodian. However, a parent does not automatically become the custodian, nor has the right to transact on a WUTMA account.

If the custodian had designated a successor custodian, at the time the custodian opened the WUTMA account, for instance, this type of issue could have been avoided.

Q4: What if a custodian wants to close out a WUTMA account with my financial institution? Do I write the check to the custodian? Do I write the check to the beneficiary?

A4: As the funds are still subject to the WUTMA provisions, it is best practice to write the check to [name of minor] by [name of adult custodian] under WUTMA. In using this language, another financial institution will know that the funds are subject to WUTMA and can accurately identify the minor beneficiary and the adult custodian.

As a resource to its members, Wisconsin Bankers Association’s legal department provides information related to banking laws and regulations. For specific questions regarding WUTMA accounts, please email wbalegal@wisbank.com or call 608-441-1200.

By, Ally Bates

Q: Can a Deposit Account with a Payable on Death Beneficiary have a Contingent Beneficiary?

A: No. Wisconsin Section 705 covers non-probate transfers at death. WBA does not read section 705 to permit contingent beneficiaries.

The WBA payable on death beneficiary designation form was created in accordance with the below interpretation of Wisconsin Section 705 and thus does not permit contingent beneficiaries. It has been WBA’s longstanding opinion that the POD statute does not permit identification of contingent beneficiaries to accounts governed by Subchapter 1 of the Chapter 705. Accounts covered by this statute include most standard checking, savings and certificate of deposit accounts established by a standard deposit account agreement.

The POD statute specifies who is entitled to payment on a POD account on the death of the last surviving accountholder. Under 705.06(1)(c), the funds are paid to the beneficiaries who survive the death of the last surviving accountholder. If none of the beneficiaries survive, the funds are paid to the estate of the last surviving accountholder. This is the way the WBA form is drafted.

The statute provides a second option under 705.04(2)(d), under which funds otherwise payable to a beneficiary who predeceases the death of the last surviving accountholder, would pass to the beneficiary's issue who would take under 854.06(3).

When the option to pay the beneficiary's issue was added to the POD statute, it was WBA’s understanding that the decision was made not to draft for this option. We believe that not all persons would want the issue (without identification of specific children) to receive payment. Further, the bank would not have any easy way to identify all of the issue who would be entitled to the payment. The identity of a person's issue can change throughout the term of the account.

However, the statute does not permit any other payment of fund in a POD account. The statue does not authorize payment to named contingent beneficiaries.

The WBA POD beneficiary form was drafted to follow the above. Thus, if a bank wishes to contract in a way to appoint contingent beneficiaries for a customer's deposit account we recommend working with the bank's own counsel to either modify WBA's form or create a separate designation. If your bank does not use WBA forms we recommend consulting with your forms drafters to determine what their interpretation of Section 705 is with respect to contingent beneficiaries.

Note: The above information is not intended to provide legal advice; rather, it is intended to provide general information about banking issues. Consult your institution's attorney for special legal advice or assistance.

By, Scott Birrenkott

Does your CRM process set you up for success?

Providing credit is a fundamental component of the banking business model, but as banks (and the financial services industry as whole) have become more complex it can be tempting to let the act of lending diverge from the credit standards that guide the institution. When that happens, the bank's credit culture can cause financial and reputational risk. "Banking is a unique animal," said Tom Siska, Associate at Plante Moran. "The greatest source of a bank's income is also the greatest source of risk: the lending portfolio." So how can banks avoid falling into bad habits as credit quality rises? "It starts with the board making credit quality a top priority," said John Behringer, CPA, Partner at RSM US LLC. Credit loss, and particularly systemic credit loss across multiple loan segments, is a critical risk for every lending institution, so the board must be confident in its ability to oversee the loan portfolio. "Credit risk management, also called loan portfolio management, is the first line of defense between success and failure in managing the number one risk for a bank," said Michael Wear, an instructor at WBA's Commercial Lending School and also a faculty member and Loan Portfolio Management Section Leader at the Graduate School of Banking – Wisconsin. Boards and management can ensure their policy and monitoring processes are sound by first recognizing their level of risk, finding the balance between detail and summary for the board, and then assessing their operations. 

Recognize Risk

Effective director oversight of the credit function requires the board to have a comprehensive understanding of the risks present in their institution's market(s) and of their comfort level with that level of risk. This has become an area of concern for regulators, as well. In the winter issue of its Supervisory Insights publication, the FDIC highlighted credit risk trends in CRE, ag, and oil and gas lending, and reiterated the importance of maintaining strong risk management processes.* The OCC, meanwhile, addressed similar issues in the Spring 2016 issue of its Semiannual Risk Perspective publication, which allocated significant focus to elevated CRE and operational risks, in particular. "Anytime you have a concentration you need to be aware, as a director, of what percentage of your loan portfolio is in that particular concentration and what the overall impact will be if something happens in the economy," Siska advised.

In addition to their focus on concentrations, regulators have also begun to watch competitive pricing closely. "Appropriate pricing of risk is the principal business of any bank," said Siska. "The regulatory bodies are starting to get concerned with competition for interest rates, so they're watching that very carefully. Banks, for the most part, have been very careful to grant loans on a sound and collectible basis coming out of the recession," he continued. "Any slippage we see is usually due to competition." 

Of course, the economy is also a major factor in assessing credit risk at a particular institution. "We've had good times these past few years, but that's when bad loans are made," said Wear. He recommends recognizing and monitoring potential systemic risk causes, augmented with scenario-based stress testing on larger credits and loan loss reserve adequacy in aggregate. "You have to think outside of the box when coming up with the absolute worst-case scenarios and how they might impact you," he explained. Bank boards are made up of business and community leaders, and management should leverage that expertise. "Boards know their marketplace—along with its intrinsic risks—better than any computer program or risk model," said Wear. Forecasting and stress testing the portfolio for a more difficult economy is essential to prepare the bank for potential issues. "We're closer to the next recession than we are to the last one," Behringer said, noting that we're currently in one of the longest economic expansions in U.S. history. "The more you spring clean now, the better prepared you'll be for the next downturn."

Balance Perspective and Detail

In addition to a full understanding of the risks in the loan portfolio, bank directors also need the right balance of detailed loan reporting and summarizations that provide a wide perspective. According to Behringer, the degree of board engagement depends on the bank; for example, an institution with a concentration in high-risk loans—such as CRE—requires more detailed monitoring. "The board should spend time designing their dashboard with management to identify and measure loan portfolio risk indicators," Behringer recommended, adding that the board must then review that dashboard each month. 

Effective monitoring requires watching for trends, both within the bank's loan portfolio and externally in the local economy. "Directors really need to have their finger on the pulse of the loan portfolio," said Siska, recommending a period review of peer data as it relates to asset quality. "Every bank has a unique economy," he explained. "A small town bank in northern Wisconsin is not in the same economy as a large bank in the heart of downtown Chicago, so that's why peer comparison is important." That peer data is a reliable source for the board to provide perspective on sector trends, for example. Internally, loan exceptions are one piece of data the board should watch carefully. "Policy exceptions are a great way for the board to track how well employee behavior aligns with the bank's risk tolerance," Wear explained.

However, the board also needs to be able to drill down into individual loans, at times. A certain level of detail is required when assessing exceptions to the loan policy, for example. So how can you tell when board reports are in the "sweet spot"? "Successful early identification of weakening conditions of borrowers—before they hit traditional problem delinquency or problem loan reports—is a good litmus test that you have the balance between detail and perspective right," said Wear. 

Compare Policy and Operations 

The best way for the board to fulfill sound credit oversight is to perform a periodic, comprehensive assessment of the bank's loan operations to ensure that all policies and procedures match staff practices. "Whoever the institution is, the process is the same," said Siska. 

1.    Define your Risk Appetite
Since the bank's comfort with different levels of risk depend greatly on the bank's strategic goals, Wear says it's critical for the board to first identify the mission and goals of the institution. "This is the guiding light for everyone in the bank and is usually consistent through good and bad economic times," he said. Doing so will help the board to clearly articulate the risk appetite of the bank, which impacts both the written policy and the operational procedures it prescribes. "It's the board's job to define the risk appetite of the bank, and the riskiest asset most banks hold are their loans," said Behringer. 

2.    Compare Policy and Portfolio
Next, review the loan policy and the bank's current portfolio; compare the two and identify gaps where they indicate different comfort levels with risk. Examine areas of concentration and loan exceptions, in particular. "Look at the loan policy no less than annually and assess if it still aligns with the risk appetite of the bank," Behringer advised. "Especially look at exception reporting and concentration reporting relative to capital and the overall portfolio."

3.    Monitor Behavior: Loan Documentation
Many credit risk reviews stop there, but it is essential that the board also know whether the operational practices of bank employees align with the philosophy set out in the credit policy and visible in the loan portfolio. "When we see errors, it tends not be to in the design of the controls but the operating effectiveness," said Behringer. "The breakdown that leads to the greatest risk is when we approve a structure for a borrower in a certain way, but that doesn't carry through to the loan documentation or the monitoring process." A full analysis requires that the bank's loan documentation procedures are clear and in writing. "Make sure it's detailed, complete and consistent from loan to loan," Siska advised. "The process should be one the bank is comfortable with and also gives them all the information they need about each borrower. Anyone should be able to open the file and find what they need." 

4.    Monitor Behavior: Loan Administration
A thorough credit risk review must follow the process from "cradle to grave," so after reviewing loan documentation practices, the next step is to review the bank's loan administration practices. "Credit administration is the mortar in between the bricks of a solid credit culture," Wear explained. "It has to be consistent." The bank's loan administration practices provide for an "early warning system," Behringer explained, allowing the bank to intervene before a customer goes into default. "The sooner you can identify an issue, the sooner the bank can work with the borrower, which is a hallmark of a community bank," he said. Loan administration can be a positive customer touchpoint when done well, according to Wear. "Past due loan renewals are a customer service failure," he asserted. 

5.    Identify your Tools
Finally, identify the tools your institution will use to conduct this review on a timely, consistent basis. Some banks will find complex software tools the most applicable to their situations, while others can succeed with Excel spreadsheets. It all depends on the complexity of the bank and its portfolio. Whichever tools you use, however, remember that they are not a panacea. "Sometimes banks tend to view software products as the solution when really they're just a tool," Behringer cautioned. "You can have the best technology in the world but your procedures and your people need to be effective as well in order for the process to work." 

In addition, a loan grading system can be helpful for the board, according to Siska. "They should have a loan grading system in place as part of their policy, and the directors should know how to interpret it," he said. Another option is to categorize all loans, which helps identify concentrations. "I'm a big fan of categorizing the portfolio," said Wear, suggesting banks use the North American Industry Classification System (NAICS) on both commercial and consumer loans. "Even for consumer loans, we should know where your concentrated sources of repayment originate, such as how many customers have the same employer or industry," he said. "For investment CRE loans, tenant industry concentrations can be combined with data from commercial and consumer portfolios to provide an overall picture of industry or sector exposure," Wear added.

Credit risk management is one of the bank board's most fundamental duties, and developing a careful process to guide that oversight benefits the bank, its shareholders and employees, and the community as a whole. "Directors are responsible for ensuring that overall, lending is done responsibly with a concern for the soundness of the bank, shareholder returns, and meeting the credit needs of the community," Siska explained. "Scrutiny of the process is important."

Plante Moran is a WBA Silver Associate Member.
RSM, US LLC is a WBA Bronze Associate Member.

By, Amber Seitz