Florida Banking July 2022

Intracoastal Bank Building Loyalty and Longevity THE MAGAZINE OF THE FLORIDA BANKERS ASSOCIATION WWW.FLORIDABANKERS.COM JULY 2022

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THE MAGAZINE OF THE FLORIDA BANKERS ASSOCIATION

VOLUME 37 NUMBER 6 JULY 2022

ON THE COVER 8 - - - - - - - - Intracoastal Bank: Building Loyalty and Longevity

CONTENTS 4 - - - - - - - - -Chair’s Message 6 - - - - - - Straight Talk from the President’s Desk 12 - - - - Government Relations: Like a Horror Movie —The Credit Unions are Coming for Your Public Deposits Again! 13 - -BancServ Endorsed Partner: Synthetic Identity Fraud: A Serious Payments Industry Concern 16 - -Trust Banking: The Trustee's Tightrope — Balancing the Conflicting Interests of Income and Remainder Beneficiaries 18 -----------Milestones in Florida Banking 20 - - - - - - - - FBA Leadership Dinner Honoring Florida Gov. Ron DeSantis 24 - - - - - Personal Transactions 26 -------------Kudos 29 - - - - - - FBA Staff Spotlight 30 - - - - - - - Upcoming Events 31 - - - - - - - - DidYouKnow? 31 - - - - - Advertising Directory

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Florida Bankers Association asanchez@floridabankers.com Pamela Ricco Executive Vice President and Chief Operating Officer Florida Bankers Association pricco@floridabankers.com Brooke Harrison Publications Director Florida Bankers Association bharrison@floridabankers.com

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6

Bill Penney Chair Jose Cueto Chair-Elect

Fab Brumley Immediate Past Chair

Greg Nelson Second Immediate Past Chair

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On the Cover: Bruce Page, CEO and Director (Left), and Ryan Page, President and Chief Risk Officer

Florida Bankers Association: The voice of Florida banking since 1888.

Photos by Daniese Betito, Images for Business, Orlando, Fla.

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CHAIR’S MESSAGE

READY TO REPRESENT OUR INDUSTRY

BY BILL PENNEY, FBA CHAIR

“IF YOU START ME UP, I’LL NEVER STOP…” - “START ME UP” BY THE ROLLING STONES

I t will be my privilege to serve as your FBA Chair for the 2022-23 year, continuing a proud tradition of service and advocacy for our industry. Big thanks to our Immediate Past Chair Fabiola Brumley for her poise and leadership over the past year. It has been a pleasure to work at her side and learn from her as I prepared for the role. I have been involved with the FBA for more than 10 years now, having served as Chair of the Florida Bankers Educational Foundation (FBEF), from which I’d received a scholarship in college, and also participated in many Washington, D.C., “fly-ins.” My time on the Political Action Committee with Barnett Bank at the beginning of my career gave me an interest in politics and advocacy. I began to understand the importance of speaking out for our industry, both at home and in our nation’s capital. FBA President & CEO Alex Sanchez often says that successful advocacy must be done face-to-face, and the FBA tirelessly forges relationships with key representatives and policymakers to score those sit down meetings and earn their listening ear. It is always an honor to join the FBA in Washington, D.C., and it will be more so now as your Chair. Representatives are always impressed by how often we “show up.” It is meaningful for them to hear directly from us bankers who are on the ground each and every day serving our customers and local communities. We will continue to educate our representatives about the issues impacting our industry, like the climate reporting requirement, SBA direct lending, the ILC loophole, and credit union taxation, among others. Repetition is the name of the game, and I will raise

these issues again and again if that’s what it takes to push us forward. As Chair, I am passionate about protecting our free enterprise system, pressing the issue of tax-exempt credit unions, and maintaining FBA membership. Our country has the best entrepreneurial system in the world, and it is incredibly important that our banks continue to fuel the fire for the explorers and entrepreneurs. It is important, too, for our association to grow and adapt in these changing times. At the FBA, we are dedicated to improving our educational offerings and curating unique opportunities for members. We invite your participation. We need you to voice your challenges and concerns so that we can pass them on to the appropriate leaders and decision-makers. As bankers, we care deeply about our communities. We’re leaders. The more that you get involved, the more you realize that you can make a difference. What does it look like to get involved? Attend our events. Answer our calls to action. Sign up for a webinar. Serve on one of our many boards or committees. There are many ways for you to plug in with the FBA, and we welcome your voice. I could not be more grateful for the connections and friendships I’ve made through my involvement with this organization. I look forward to serving alongside Chair-Elect Jose Cueto, another community banker who is dedicated to the growth of our industry. I am grateful to my team at Marine Bank & Trust for their support as I take on these new responsibilities. Here’s to a busy year of championing our industry!

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ELECTIONS MATTER: THE DIFFICULT CASE OF THE CONSUMER FINANCIAL PROTECTION BUREAU STRAIGHT TALK FROM THE PRESIDENT’S DESK

BY ALEJANDRO “ALEX” SANCHEZ, FBA PRESIDENT AND CHIEF EXECUTIVE OFFICER

W hich federal government agency in our nation’s capital wins the award for being most politically motivated? The Consumer Financial Protection Bureau (CFPB) wins that prize. The CFPB was effectively on hiatus from January 2017 until January 2021, when the agency returned in full force under the leadership of President Biden and his named CFPB Director Rohit Chopra. How can this be? Well, the moral of this story is that elections matter. You can’t vote for candidates that don’t like our industry and believe that everything will come

experiences at so many parts of their financial life.” Those words by Director Chopra were a mistake and never should have been stated. The CFPB’s continuing odyssey with stopping NSF fees is also out of control, as time after time it has been shown that overdraft protection is one of the most asked-for services by bank customers. (A recent ABA/Morning Consult survey revealed that nine in 10 consumers find their bank’s overdraft protection valuable, and well over half believe it is reasonable for banks to charge a fee for the service.) But I must also say that on our Zoom call with

up roses. Neither life nor elections work that way. That is why I always tell people that I am a “one trick pony” when I vote; I support candidates who will support our industry. That is the question I answer when deciding who to vote for. The CFPB will cause increasing regulatory burden for our industry and especially for community banks. Why does this matter? As the number of community banks in our country diminishes, it is vitally important to know

Director Chopra earlier this year, we urged him to go after the “shadow banking industry.” A few days after our call with Director Chopra, the CFPB said it would invoke a “largely unused” authority under the Dodd-Frank Act to directly examine nonbank financial services providers. “Given the rapid growth of consumer offerings by nonbanks, the CFPB is now utilizing a dormant authority to hold nonbanks to the same standards that banks are held

“BUT THE BOTTOM LINE IS THAT WE MUST ENGAGE ALL POLICYMAKERS, BOTH THOSE WE AGREE WITH AND THOSE WE DON’T.”

which of the agencies are increasing the regulatory costs for our community and regional banks. The CFPB is one of those agencies. During a recent House Financial Services Committee hearing, Republican lawmakers asked CFPB Director Chopra to define what he meant by “junk fees” — a term coined by the bureau as part of a media campaign — but Director Chopra would not offer any formal definition. When asked by Rep. Andy Barr (R-KY) if he could offer “any legal or statutory authority that defines ‘junk fees,’” Chopra replied: “No. Junk fees are something that everyone

to,” said Director Chopra. “This authority gives us critical agility to move as quickly as the market, allowing us to conduct examinations of financial companies posing risks to consumers and stop harm before it spreads.” Was that decision by Director Chopra a coincidence? Did the FBA play a role in making that happen? There is a long line of those who will take credit for this action and let them do so. But the bottom line is that we must engage all policymakers, both those we agree with and those we don’t, which is why the FBA scheduled a meeting with Director Chopra.

6 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

There is no question that our industry is going to disagree with Director Chopra. But I strongly believe that we must continue to speak to those with whom we disagree. The FBA was the first banking association to conduct a Zoom call with Director Chopra. A few other associations have followed in our footsteps. The FBA in this regard is very active in scheduling both virtual and in-person meetings with key policymakers. Avoiding Director Chopra will not help our industry. During our meeting, we discussed the tough issues impacting our industry that Director Chopra has before him. Though it was not easy to have this conversation, it had to be done. Over 200 FBA members were on that Zoom call. Our industry must persist in communicating with Director Chopra. Was it easy to schedule this meeting? No, it was not! I called a friend of a friend to make it happen. The months ahead will not be easy for our industry. The FBA is fighting the plans by the

Biden Administration, its “climate czar” John Kerry and others to make banks the climate police. The regulatory cost of compliance would kill the nation’s community banks and many of the smaller regional banks. The FBA has been clear on that front, speaking out in the hallways of Washington and on national television in interviews on Maria Bartiromo’s show. Our community banks play a vital role in providing capital to the nation’s small businesses, and that is why this is important. These banks will sell out before succumbing to the ballooning compliance costs of acting as the climate police. This is why elections matter. I am a one trick pony for our industry. Please remember, elections have consequences. The FBA will never give up and we will continue to strongly advocate for our industry and for a stronger economy, as we have since our founding on the 28th day of February in 1888.

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Intracoastal Bank management members available for photo (l to r): Chief Lending Officer Rick Wells, CEO Bruce Page, President Ryan Page, and Consumer Banking Manager Laura Gilvary.

8 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

BUILDING LOYALTY AND LONGEVITY

H eadquartered in Flagler and Volusia counties, Intracoastal Bank is named for the Atlantic Intracoastal Waterway that runs through downtown Daytona — a testament to the bank’s commitment to its community and the local customers it serves. The bank is “14 years young,” having been established in 2008 as an S-Corporation. Today, Intracoastal Bank is owned by 73 “family units” representing 138 shareholders, including all bank associates through its employee stock ownership plan (ESOP). “Our board and founding shareholders were steadfast in their belief that opening a locally-owned and

“Banking is a well-balanced career; you learn about a lot of different industries and you get to use both your analytical and social skills to help people,” Ryan Page said. After college, Ryan moved to Colorado and joined an international bank to gain experience in international business. It was former Chairman Tom Gibbs and family friend Rick Wells, chief lending officer at Intracoastal Bank, who recommended Ryan join the team. Wells took the lead when it came to recruiting him to the bank. Gibbs, Wells and Bruce understood the importance of succession planning; you’ve got to get ahead of it 5-10 years in advance.

managed community bank was the right thing to do,” said Intracoastal Bank CEO Bruce Page. Page started his banking career with Barnett Bank; he credits his management training with Barnett as one of the most educational experiences of his career. When Barnett Bank sold, Page said it left a “vacuum” in the state banking industry. This was when Page’s wife advised him to start his own community bank. “Intracoastal was launched as a new, innovative, forward thinking bank for the long term benefit of the business community,” Page said.

Intracoastal Bank focuses on succession planning in advance at all levels of the organization including the Board. “I wanted to be entrepreneurial and accomplish a lot with a small group of people who knew each other well,” Ryan Page said, speaking about his decision to return home and join Intracoastal Bank. The bank is passionate about recruiting. At the core of its values and culture is trust. “Trust is critical in our business. Knowing one’s character plays a role in how we recruit,” Bruce Page said. “Some in our industry believe the talent isn’t there; that’s not the case. We just have to be proactive about finding, training, and developing talent. At Intracoastal Bank, we are

“SOME IN OUR INDUSTRY BELIEVE THE TALENT ISN’T THERE; THAT’S NOT THE CASE. WE HAVE TO BE PROACTIVE ABOUT FINDING, TRAINING, AND DEVELOPING TALENT. AT INTRACOASTAL BANK, WE ARE POURING OURSELVES INTO THE NEXT GENERATION.”

He believes that the bank’s unique status is to its advantage; S-corp banks, while generally smaller, are known for their longevity. “When you’re smaller, you can narrow the scope of your strategy and tailor it to your community. We can stay closer to our customers,” Page said. Intracoastal Bank President Ryan Page added, “[Our size] helps us focus on our strengths. Focus leads to better execution, and in turn, customer and shareholder satisfaction.” Ryan Page is Bruce’s son; he joined the bank in 2016 and has served as president, chief risk officer, and a member of the Board of Directors since December 2020. Ryan is poised to succeed his father as CEO. Bruce was clear that his son’s career in banking was not a predetermined path, but rather an unexpected and welcome surprise.

- BRUCE PAGE

pouring ourselves into the next generation.” Ryan Page believes that it’s best practice to always be recruiting; stay in touch with the people you meet, because you never know when you may have a chance to recruit them to your team. “Every person we’ve added has helped us attract the next person,” Ryan Page said. The bank’s leadership has noted that one of the top complaints about the industry concerns the rapid consolidation and turnover with bank relationship managers. Intracoastal Bank is intentional about creating a culture of loyalty and longevity. Employees Intracoastal Bank, Continued on page 10

WWW.FLORIDABANKERS.COM JULY 2022 — 9

2018. The bank’s primary niche is providing financial services to small- to mid-size businesses and meeting the personal banking needs of the owners of those companies. “Banks have the potential to be cornerstone businesses of a community; when a community

Intracoastal Bank, Continued from page 9

are called “associates,” which Bruce and Ryan believe is a more appropriate term to describe their staff’s status as partners and owners. “We have 44 associates who are partners through our employee stock ownership plan. This has instilled

an ownership-thinking culture where all staff — ‘associates’ — can relate to clients as businesspeople,” Bruce Page said. Ryan added, “It’s unique to come to work each day and realize that the decisions you’re making are impacting you as an owner.” Today, Intracoastal Bank has $551.6 million in assets, and every one of the bank’s associates owns a share of the business. “When there’s no employee stock ownership plan, employees don’t think about the bank’s money as their money,” said Tara Gugliara, Universal Banker.

bank leaves an area, that area suffers. We want to be one of those cornerstone employers and businesses in our local community,” Ryan Page said. This means that Intracoastal Bank has a role to play in the ongoing revamp and development of downtown Daytona Beach, particularly the historic area of town. The majority of the bank’s leadership team are long term residents of the greater Daytona Beach area who have been active in many community and civic organizations. “We get up every day and get to serve our community,

“BANKS HAVE THE POTENTIAL TO BE CORNERSTONE BUSINESSES OF A COMMUNITY… WE WANT TO BE ONE OF THOSE CORNERSTONE EMPLOYERS AND BUSINESSES IN OUR LOCAL COMMUNITY.”

- RYAN PAGE

“We’re rewarded with stock in the company, and it builds employee loyalty. It’s a really cool program.” Intracoastal Bank was recognized by the Daytona Regional Chamber as Small Business of the Year in

and our clients, and that is an honor. They trust us, and we take that commitment seriously… and it goes beyond banking. We are in it for the long haul with them,” Bruce Page said.

The Intracoastal Bank team.

10 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

BRUCE PAGE , CEO AND DIRECTOR

Bruce Page has served as CEO and director of Intracoastal Bank since it was formed in 2008 and is currently chairman of the board. He has 38 years of banking experience. Page started his career with Bank of America (formerly Barnett Bank), and he worked in many Florida counties including Lee, Flagler, Volusia, Pasco, Manatee, and Orange. Page served as president, CEO, and director of Cypress Bank from 1998 until the bank merged with Coquina Bank in 2004, then spent two years as president / chief operating officer and director of CypressCoquina Bank. He majored in Finance and earned a Bachelor of Science degree in Business Administration from the University of Florida in 1984. He is also a graduate of the Stonier Graduate School of Banking. Page was raised in Flagler/Volusia County and has lived in the area for more than 45 years. He has played an active role in the community through his leadership and involvement in many local organizations, including United Way of Flagler and Volusia Counties, Community Foundation, SMA Healthcare/SMA, Advent Health, Flagler County Rotary Club, Flagler/Volusia Advanced Technology College, Boys and Girls Club of Flagler and Volusia Counties, Enterprise Flagler, Flagler County Chamber of Commerce, and Flagler County Education Foundation.

RYAN PAGE, PRESIDENT AND CHIEF RISK OFFICER

Ryan Page is president and chief risk officer of Intracoastal Bank and has been a member of the Board of Directors since December 2020. He previously served as a senior vice president / chief credit and risk officer. Prior to joining the bank in 2016, Page worked for PNC (formerly BBVA Compass) as an associate relationship manager in the Denver commercial banking group. He completed their Leadership Development Program where he received extensive training on all primary bank functions with a focus on commercial lending and underwriting. Page graduated from the University of Florida with a Bachelor’s Degree in Business Finance and a Master’s Degree in International Business. He is also a graduate of the Stonier Graduate School of Banking. Page is a Florida native and a third generation Volusia / Flagler resident. He has a passion for volunteering with a focus on education, small business and the environment. He is active in many local civic organizations including the Daytona Regional Chamber of Commerce and the United Way of Volusia-Flagler Counties (Director). He completed the Chamber’s leadership program and is a board member of the United Way. Page is the founding chair for the United Way’s young professional board, known as Generation IMPACT.

WWW.FLORIDABANKERS.COM JULY 2022 — 11

GOVERNMENT RELATIONS

LIKE A HORROR MOVIE — THE CREDIT UNIONS ARE COMING FOR YOUR PUBLIC DEPOSITS AGAIN!

BY ANTHONY DIMARCO, FBA EXECUTIVE VICE PRESIDENT AND DIRECTOR OF GOVERNMENT AFFAIRS

J ust like the horror movies I watched on Saturday afternoons as a kid, the credit unions are coming back for your public deposits in the 2023 Session! Their state PAC has outraised ours and they are beginning to hire more outside lobbyists for the upcoming Session. Moreover, credit unions are buying community banks across the state at an alarming rate. Our fight with credit unions over public deposits has been going on since 2009 when they made their first legislative attempt to take them. We have been

Kenneth, Alex, Gina and I are working to stop this bad legislation. During this campaign season, we are going around the state talking to candidates and helping during the campaign process. While this is great help — our best advocates are our members. What can you do? First, talk to your local legislator now. Do not wait — many seats will be decided in the primary. Get to know your candidate. Help the campaign with either time or treasure. It is better to tell them about our issue now instead of right before they vote.

able to beat them back; however, they are taking their advocacy to a new level for the 2023 Session. How are they going about this? The credit union PAC has raised a great deal of money. Five credit unions have contributed almost $580,000 to their PAC during this time. One alone, Suncoast, has contributed $170,000 to their PAC. Because they outraise us, they can also outspend us. Credit unions have donated more than $270,000 to state candidates, parties, and leadership funds so far for the 2022 election cycle.

Also, attend any legislative event we host in your area. These smaller events help legislators get to know their local bankers. Finally, answer our Calls to Action quickly and forcefully when issued. Your response will be even better received if you have taken the time to get to know the legislator back at home before Session. You will be surprised how strong your message is with legislators. More than once I have heard, “My banker called me about this issue and I need to vote with them,” or “I met

“MAKE NO MISTAKE, CREDIT UNIONS ARE COMING FOR PUBLIC DEPOSITS NEXT SESSION AND THEY ARE COMING HARD.”

They are sitting on more than $460,000. They have consistently outspent us and will do so again this year. The credit unions are also hiring more lobbyists to push their issue. Not only have they hired two of the best lobbying firms in Tallahassee, but VyStar has hired two in-house lobbyists to push this issue. It seems like I am hearing from another lobbyist every day, letting me know they are looking for more outside lobbyists to put on contract.

my local banker when I was first running, and he explained this issue to me when he helped on my campaign.” It makes us feel much better when we hear these words from legislators. Make no mistake, they are coming for public deposits next Session and they are coming hard. We promise that we will do everything in our power to kill this bad piece of legislation. We hope we can count on your help as well. Thank you.

12 — FLORIDA BANKING THE VOICE OF FLORIDA BANKING

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SYNTHETIC IDENTITY FRAUD: A SERIOUS PAYMENTS INDUSTRY CONCERN

BY MIKE BURKE, SENIOR ROBBERY AND CRISIS MANAGEMENT CONSULTANT, SHAZAM

T he U.S. payments system, one of the nation’s essential infrastructures, is continually challenged with fighting fraud threats that are evolving as technology advances. In 2018, the Federal Reserve launched an initiative to raise awareness about synthetic identity fraud, reportedly the fastest growing financial crime in the United States. The Center for Payments™, a joint program sponsored by the U.S. payments associations, supports the Fed in educating financial institutions about synthetic identity fraud and encouraging proactive measures to mitigate this risk. What is synthetic identity fraud? Unfortunately, where money is in motion, there are those looking to steal it. While fraud isn’t new, the perpetrators’ techniques are constantly evolving. Synthetic identity fraud (SIF) is the use of a combination of personally identifiable information (PII) to fabricate a person or entity to commit a dishonest act for personal or financial gain.1 Synthetic identity fraud has gained prominence in recent years for several reasons: • Social Security number randomization in 2011 eliminated the geographical significance of the first three digits (the area number) and the chronological significance of the remaining digits. Social Security numbers had previously been more useful in corroborating other forms of identification. • The increase in PII available to fraudsters has increased significantly in recent years due to the spike in data breaches in the beginning of 2017. Also contributing to this issue is the amount of PII consumers voluntarily make available on social media. • Finally, synthetic identities often escape detection during the credit application process, which is becoming increasingly automated.

While traditional identity theft is well understood, it’s often mistaken or confused with synthetic identity fraud. Traditional identity theft occurs when a fraudster pretends to be another real person, usually supported by the person’s Social Security number, date of birth, driver’s license, bank account login credentials, or other sensitive information the fraudster has captured. The fraudster then uses the victim’s identity to access credit, accounts, and other items of value. This more traditional type of fraud is usually detected and reported quickly, as victims begin to receive unfamiliar notifications, phone calls from creditors, and other red flags that tip them off. Synthetic identity fraud is different and results in creating a brand-new identity. Here’s one example of how it can work: 1. Fraudsters buy PII or other personal information on the dark web. This data is usually exposed to the dark web by data breaches, social engineering, or oversharing on social media. Whose PII do they steal and use? Here’s where the real danger lies. 2. In some cases, the fraudster uses the Social Security number of a child or an elderly or homeless person. Why? Because children, elderly and homeless people don’t actively use their credit and are less likely to notice the fraud for some time. 3. Then, the fraudster applies for credit using their newly minted identity. Even if the institution denies their application, the inquiry creates a credit file with the credit bureaus, which can help validate the identity in the future. 4. Undaunted by the first few denials of credit, eventually someone will approve the application. Many times, the initial credit is granted by a high-risk lender. The fraudster will

Synthetic Identity Fraud, Continued on page 14

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• Multiple credit applications from the same phone number, mailing address, or IP address. • Use of secured credit lines to build credit. • “Piggybacking” to build credit (applicant is an authorized user on multiple established credit accounts which may be associated with geographically dispersed addresses). • Multiple authorized users on the same account. Also, the Social Security Administration has introduced an electronic Consent Based Social Security Number Verification Service (eCBSV) to help identify synthetic identity fraud. With the consent of the SSN holder, eCBSV can verify if the SSN, name, and date of birth combination provided by an account applicant matches Social Security records or not. eCBSV returns a match verification of “yes” or “no.” If SSA’s records show that the SSN holder is deceased, eCBSV returns a death indicator. This service was introduced by the SSA in 2008 as a paper-based process, but the initial roll-out of a more efficient, electronic version has been Verifying your customer can be even more difficult if you never see the account applicant in person. Online account opening, already gaining in popularity thanks to consumer demand, has quickly accelerated with a big push forward due to the Covid-19 pandemic. Many financial institutions are challenged to safely meet the increased demand for more digitized services. To build on the work of the Fed and to help support financial institutions that want to offer online account opening, the Center for Payments recently conducted a study called Digitizing Payments: The Online Account Opening Experience 4 . Over 500 c-suite executives from financial institutions of various sizes were surveyed to examine current practices and procedures to detect, evaluate, and mitigate fraud risks throughout the online account opening process. The key findings are: • Online account opening is a growing trend in financial services. • Risk avoidance is the key rationale for not offering online account opening. • It is critical for financial institutions to understand the types of fraud risks associated with online account opening, such as synthetic identity fraud. • Financial institutions that offer online account opening use various tools and techniques to mitigate fraud risks, including additional steps beyond their standard Customer Identification Program (CIP) requirements. Visit the Center for Payments website for an executive summary of the study: “Digitizing Payments: The Online Account Opening Experience 4 ”, and contact your payments association for access to the full report which provides more information on ways to support a safe, secure online account opening experience. in a pilot phase since June 2020. What else can be done?

use this initial line of credit to establish a timely repayment history to cultivate higher credit limits and even more accounts. This can all take time, but the fraudster certainly has that. The process continues as the fraudster’s efforts gain momentum, they generate a solid credit history, proceed to build their identity with social media accounts, and a home address (usually a P.O. box, vacant property, or vacation home). More sophisticated operations even create fake businesses and sign up with merchant processors to install credit card terminals to run up charges on fraudulent cards. This activity causes the fraudster’s credit score to increase. After all, they’re making payments on time, achieving increases in credit limits, and solidifying their identity. This is when they “bust out.” The term “bust out” refers to maxing out a credit line and vanishing without repaying. Sometimes, a fraudster will use a fake check to pay off the balances before maxing out a credit line again and defaulting. Adding insult to injury, some fraudsters even cry “identity theft” and have their charges erased…before making additional transactions and repeating the process. Who bears the cost? Generally, the individual whose personal information was used to create the false identity won’t be responsible for losses, provided they can prove they weren’t behind the synthetic identities. Rather, financial institutions bear most of the cost of this type of fraud. Industry experts estimate the load borne by U.S. financial institutions at over $14.7 billion in 2018.2 Further, roughly 20 percent of credit losses in the financial industry are believed to stem from synthetic identity fraud.2 What’s a financial institution to do? The best time to detect synthetic identity theft and prevent the risk of loss is at the time of account opening. The problem is, synthetic identities often pass traditional Know Your Customer (KYC) compliance requirements, which rely heavily on an established credit history and assume the first Social Security number in a credit file is valid. To detect synthetic identity fraud, it’s important to look beyond the basic identifying information to verify whether an identity is legitimate or synthetic. In its white paper, “Detecting Identity Fraud in the U.S. Payment System3” the Federal Reserve advises financial institutions to look for the following characteristics of a synthetic identity: • Social Security numbers issued after 2011. • Credit file depth inconsistent with the customer’s age or other profile information (such as a 60-year-old applicant with a credit file less than a year old). • Multiple identities with the same Social Security number. Synthetic Identity Fraud, Continued from page 13

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See the problem, solve the problem The growing problem of synthetic identity payments fraud requires the attention of all payments industry stakeholders and collaborative efforts to understand, detect, and address synthetic identity fraud in the U.S. payments system. The Center for Payments will continue to work closely with the Fed, community financial institutions, and industry stakeholders to increase awareness and mitigate the risk of synthetic identity fraud. ABOUT MIKE BURKE From teaching criminal justice classes, investigating bank robberies and embezzlement as a sergeant detective, and serving as the founding director of the Iowa Central Homeland Security Training Center, Mike Burke is an invaluable resource for organizations looking to improve their understanding and training in robbery and crisis management. His timely, comprehensive and thoughtful presentations regarding robberies, active-shooter scenarios and loss prevention help community institutions enhance their security measures and ensure regulatory compliance. As a member of the Midwest Financial Fraud Investigators, Mike partners with law enforcement and other financial institutions to share information about fraud.

ABOUT SHAZAM SHAZAM is the nation’s only member-owned debit network, processor and core provider. Founded in 1976 and based in Iowa, SHAZAM offers: debit card processing, credit card issuing, core, fraud, ATM, merchant, marketing, training, risk and ACH. As a national leader in payments and financial technology, SHAZAM provides community banks and credit unions with resources and unparalleled client service and technology. Our mission is simple: Strengthening community financial institutions. Learn more at shazam.net. SHAZAM contact: Valerie Cibula, Senior Public Relations Specialist, vcibula@shazam.net, 515-360-1101. Citation 12021, Payments Fraud Insights, Defining Synthetic Identity Fraud, The Federal Reserve 22020, PYMNTS.com, Deep Dive: How FIs Are Looking Beyond Traditional Know Your Customer Data to Spot Synthetic ID Fraud, PYMNTS.com 32019, Payments Fraud Insights, Detecting Synthetic Identity Fraud in the U.S. Payment System, The Federal Reserve 4 2020, Digitizing Payments: The Online Account Opening Experience, The Center for Payments™

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TRUST BANKING

THE TRUSTEE’S TIGHTROPE – BALANCING THE CONFLICTING INTERESTS OF INCOME AND REMAINDER BENEFICIARIES

BY KELLY O’KEEFE, SHAREHOLDER, STEARNS WEAVER MILLER

T rustees beware. Remainder beneficiaries of revocable and irrevocable trusts can challenge how you administer a trust for an income beneficiary, and increasing inflation may give them cause to do so.1 To avoid future challenges, trustees should consider inflation risk factors when balancing the competing interests of income and remainder beneficiaries. Finding that balance may feel like a tightrope act for a trustee. A trustee, like the tightrope walker jumping on a tightrope without an understanding of the circumstances and tools needed to adjust to strong winds, can lose her balance. This article describes some of the factors a trustee should consider when balancing the conflicting interests of remainder and income beneficiaries, and explores how remainder beneficiaries can upset trustees’ efforts to maintain that balance. Recall that a remainder beneficiary’s interest in a revocable trust generally vests only after the income beneficiary’s interest ends. Notwithstanding, remainder beneficiaries of a revocable trust can reach back in time (subject to some limitations) to sue a trustee for breach of fiduciary duty previously owed to the deceased income beneficiary. The remainder beneficiary of an irrevocable trust can allege breach by the trustee before or after the income beneficiary’s death. To make matters worse, the income beneficiary’s interest is almost always at odds with the remainder beneficiary’s interest. Investments generating a high yield for the income beneficiary may risk the safety of the principal due to the remainder beneficiary. For example, an income beneficiary may request significant distributions to invest in her business, while the remainder beneficiaries demand less risky investments to preserve principal. Inflation could magnify the risk of making the requested distributions. So what do you do in a situation like this? It depends. Start with the Trust Language Preparation cannot fully eliminate risk for a tightrope walker or a trustee. However, a well-drafted trust may

help the trustee establish the right balance between income and remainder beneficiaries. Trusts containing language expressly overriding the trustee’s duty of impartiality can minimize the conflict. The following language, for example, should give a remainder beneficiary who is dissatisfied with income distributions pause before alleging breach by the trustee: In exercising discretion to make distributions to or for the beneficiary of this trust, the trustee shall consider the needs of the remainder beneficiaries to be subordinate to the interests of the current beneficiaries. No good faith decision to invade principal for the benefit of a current beneficiary shall be subject to challenge by any remainder beneficiary. No language is foolproof though. The trust must be read as a whole and other terms may provide guidance on balancing distributions to income and remainder beneficiaries. For example, the trust may contain specific limitations or conditions for distributions or even a schedule of distributions. These terms may fall within the sections of the trust on discretionary power of the trustee or the terms related to distributions. Obtain Consent or Court Approval Even where the trust contains clarifying language, the trustee may find the circumstances necessitate a remainder beneficiary’s consent to certain distributions. For example, the trustee would be well advised to obtain the remainder beneficiary’s written consent to distributions the income beneficiary wants to expand her risky business venture. For consent to be valid and have the best chance of withstanding future challenges, it must meet certain criteria. If it is not given by the beneficiary or an acceptable representative, it may be invalid. If the beneficiary is not fully informed of the detrimental circumstances the consent may cause, it may be invalid. Consent is a commonly litigated issue, so obtaining a written agreement from a remainder beneficiary who is represented by counsel is recommended to minimize future conflict claims.

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A trustee should also consider whether the remainder beneficiary will stand by her consent. A remainder beneficiary not wanting to upset a spouse or parent may consent to the actions of a trustee despite concerns, and later pursue a claim for breach after the income beneficiary dies. If a trustee foresees a difficult remainder beneficiary, she should consider obtaining court approval. Other circumstances might warrant court approval as well. For example, when the nature of the approval changes. A remainder beneficiary’s consent to expenditure for an income beneficiary’s hobbies is unlikely to extend to a mother’s hobbies when she takes up gambling. Court approval can avoid conflict and maintain balance in these more complicated circumstances. Exercising Discretion Regardless of consent or court approval, the trustee remains obligated to use her discretion and judgment to avoid making questionable distributions to the income beneficiary. Exercising discretion and judgment, however, does not require a trustee to treat the income and remainder beneficiaries equally, only impartially. If a grantor wanted the beneficiaries treated equally, the trust document would provide for equal distributions to all beneficiaries. Impartiality necessarily requires the trustee to make decisions resulting in unequal treatment of, and possible dissatisfaction by, the remainder beneficiary. Where and when the trustee can expect the remainder beneficiary to voice that dissatisfaction depends on multiple factors. The type of trust is a primary factor determining when a remainder beneficiary may challenge a trustee’s decisions. The Revocable Trust Per Florida’s Trust Code, while a trust is revocable the trustee’s duty is exclusively to the settlor/beneficiary and remainder beneficiaries do not have standing to challenge the trustee’s actions while the settlor/beneficiary is alive.2 A settlor/beneficiary of a revocable trust may direct the use of trust funds as she deems appropriate and a trustee has no obligation to prevent the settlor from a knowing, voluntary use of revocable trust assets. When the settlor/beneficiary dies, the remainder beneficiary may sue for breach of a duty the trustee owed to the settlor/beneficiary during the settlor/ beneficiary’s lifetime, which breach subsequently affected the interest of the remainder beneficiary. Florida courts have recognized remainder beneficiaries’ claims when the grantor/beneficiary is NOT the trustee of the revocable trust. In those situations, a remainder beneficiary could assert a trustee mismanaged trust assets when the trustee was only following a settlor/beneficiary’s instructions. The trustee should thus consider whether to obtain written consent from the settlor/beneficiary before engaging in conduct that a remainder beneficiary could challenge. If the remainder beneficiary does allege breach, Florida case law recognizes a limit on how far back the remainder beneficiary can question the trustee’s actions. Florida law recognizes other potential limits on the remainder beneficiary’s ability to allege breach by the

trustee of a revocable trust. Florida cases suggest that remainder beneficiaries cannot disturb the trustee’s decisions when the settlor/beneficiary of the revocable trust is also the trustee. In such cases, accountings of the trust prior to the death of settlor/beneficiary/trustee have been denied absent allegations of breach. It appears unlikely that such a breach can successfully be alleged absent allegations of incompetency or undue influence of the settlor/beneficiary/trustee. Similarly, it makes no sense that where a trustee owes no accounting to a settlor/beneficiary during life, the trustee should face retroactive accounting duties after the settlor/beneficiary’s death. While there appear to be limits on the ability of a remainder beneficiary to allege breach by the trustee of a revocable trust, the law in this area continues to evolve. The Irrevocable Trust While the trustee’s tightrope act has now been extended to include remainder beneficiaries of a revocable trust, trustees of irrevocable trusts have always had to find the balance between the needs of income and remainder beneficiaries. The marital trust provides an obvious example, where income is distributed annually to a surviving spouse and the trustee has the discretion to distribute principal. The remainder beneficiary, a child from a first marriage, may object to the trustee’s investments in high yield, income-producing assets like REITs or junk bonds, without regard to growth. Challenges by remainder beneficiaries of irrevocable trusts are so common that specific legislation has been crafted to provide trustees with guidance when trust documents provide little or none. Florida’s Principal and Income Act, Chapter 738, for example, allows trustees to make adjustments between income and principal3 and convert a trust to a unitrust 4 , either of which can bring about the balance needed to minimize complaints from remainder beneficiaries. Those trustee tools are beyond the scope of this article but should be reviewed with the appropriate legal and financial advisors to determine if increasing inflation requires adjustments to the trustee’s investment strategy. Conclusion Trustees must be proactive in protecting the interests of income and remainder beneficiaries of revocable or irrevocable trust. Each case is unique, but proper planning, effective record keeping and seeking the guidance of experienced financial and legal professionals can minimize risk and achieve the balance needed to master the trustee tightrope. Kelly O’Keefe is a shareholder in Stearns Weaver Miller’s Tallahassee office. She represents professional and family member fiduciaries in complex and high stakes estate, probate and trust disputes and litigation. You can reach her at kokeefe@stearnsweaver.com. 1For purposes of this article, income beneficiaries are as defined in section 738.102(6) and (12), Florida Statutes. An income beneficiary is a person to whom net income of a trust is or may be payable. A remainder beneficiary is entitled to receive principal when an income interest ends. 2§§736.0603(1), 736.0813(4), Fla. Stat. 3§738.104. 4 §738.1041.

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