FDIC Insurance and Trusts

The recent failure of a regional bank has once again focused the attention of many people on the limits of FDIC insurance.  Many investors in Silicon Valley Bank were very concerned that the could lose most of their deposits because those deposits exceeded the limits of FDIC insurance.  As of this writing in March 2023, the federal government has taken steps to see that every depositor is covered even beyond the limits of insurance, but until the deal was announced it was never a certainty.

So now is a good time to revisit the rules about FDIC insurance and trusts.  Please keep in mind that these rules only apply to March 1, 2024.  After that date new rules apply.  We will have a post covering those new rules in the future.

Having an account in a trust can increase the amount of FDIC insurance coverage to $1,250,000.  Compared to coverage of $250,000 for an individually-owned account or $500,000 for a joint account, this can be of significant benefits.

The current rules make a distinction between a revocable trust and an irrevocable trust.  Today’s post will cover revocable trusts.  The revocable trusts rules also apply to informal trust arrangements like Payable On Death accounts.  We will cover those in more detail in another post.

In a nutshell, the FDIC counts the number of beneficiaries and provides $250,000 per beneficiary, up to $1,250,000.

There are 3 rules that must be met:

1. The account title at the bank indicates that the account is a trust. For a revocable trust where there is a formal trust agreement (i.e. not a payable on death account or similar), the account title uses such terms as Living Trust or Family Trust.  It is our opinion that a title such as The Smith Revocable Trust would also meet this rule.
2. At the time a bank fails, the beneficiary must be entitled to his or her interest in the revocable trust assets upon the grantor’s death. A contingent beneficiary who is entitled to receive something from the trust only if another beneficiary is deceased, does not count for FDIC purposes.
3. The beneficiaries are living individuals and/or an IRS-qualifying charity or nonprofit organization.

An important caveat is that the FDIC combines the interests of all beneficiaries the owner has designated in all formal and informal revocable trust accounts at the same bank.

Let’s consider a few examples:  John has a revocable living trust that has one account at the bank. The bank account owner is the John Smith Living Trust.  In his trust agreement, John has designated his three children as equal beneficiaries to receive the trust assets at his death.  Since John has 3 beneficiaries who inherit equally from his trust, his one account has $750,000 of FDIC insurance.

But if John has more than one account at the same bank in the name of the trust, all the accounts combined still only have $750,000  deposit insurance.

But, if John has an account in the name of his trust and another account in his individual name, he can get another $250,000 in deposit insurance for the account that is in his own name.

Here is another example:  Bill and Betty have a revocable living trust that has one account at the bank.  Their revocable living trust names Bill’s 3 children and Betty’s 3 children as equal beneficiaries to receive the trust assets at their death.

Because the maximum insurance is $1,250,000, Bill and Betty’s trust account has the maximum amount of FDIC insurance even though they have 6 beneficiaries.

Finally, here is an example where a trust account fails the rules.  Olivia has a revocable trust account at the bank.  The beneficiary of Olivia’s account is a pet trust for her 3 horses.  Since there are not any individuals or non-profits that benefit from the trust at Olivia’s death, the account will not be treated as a trust account for FDIC purposes.  Olivia’s account will be treated as an individual account with up to $250,000 of insurance.

But, if Olivia had named her daughters Penny and Petunia to have a life estate interest in the trust assets and then a payout to a pet trust when both of them die, Olivia would be able to count her daughters as beneficiaries and have up to $500,000 in deposit insurance.  In that case, the pet trust would be a contingent beneficiary and it’s status would not be included in the calculation.

If you have questions about revocable trusts, call us to set up an initial interview at no cost.  If you have questions about FDIC insurance, consider talking to your banker.