Q. I saw a sign about FDIC insurance at the bank yesterday and it got me to thinking about our family’s trust, and I was hoping you could provide some clarification. My understanding is that the FDIC insures up to $250,000 per depositor in eligible accounts at FDIC insured banks. That’s straightforward enough for regular individual accounts, but how does this apply to trust accounts? What if we have a $400,000 trust account with two beneficiaries? Would that mean that $150,000 of the trust is uninsured? What I’m unclear about is whether the insurance limit applies to the trust as a whole, or the individual beneficiaries of the trust? Are the rules different for revocable and irrevocable trusts? Thanks for your help!
A. Thanks so much for your question! When it comes to banks, there are two main types of deposit insurance:
- The Federal Deposit Insurance Corporation (FDIC) insures deposits at most banks.
- The National Credit Union Administration insures deposits at most credit unions.
FDIC insurance kicks in when a bank fails. Established during the Great Depression, the FDIC ensures that bank deposits are safe, even if the bank goes under. The FDIC, which is funded by premiums paid by banks and savings associations, protects up to $250,000 in individual deposit accounts and up to $250,000 for each person’s share of joint accounts. FDIC insurance covers money in checking, savings, and money market deposit accounts, along with certificates of deposit and official items issued by a bank, such as cashier’s checks and money orders. The coverage extends to depositors’ accounts at each insured bank, including IRAs, living trust accounts, and payable-on-death accounts.
It’s important to know you are protected, but on a positive note, bank failures at a rate similar to the Great Depression is unlikely. I’ll still explain how FDIC insurance works, and what happens when it comes to revocable and irrevocable trusts!
How Does FDIC Coverage Work?
Deposits are insured up to $250,000 per depositor, per ownership category, per institution. These examples illustrate how that works:
- You and your spouse have individual savings accounts at the same bank, each with $200,000 deposited. You’re fully insured because your accounts have different depositors – you and your spouse.
- You have two checking accounts at two different banks, each with $200,000 deposited. You’re fully insured because your accounts are at two different institutions.
- You have a personal account and a business account at the same bank, each with $200,000 deposited. You’re fully insured because your accounts are in different ownership categories – personal and business.
- You have two individual personal checking accounts at the same bank, each with $200,000 deposited. You’re insured only up to $250,000 because both of your accounts have the same depositor, ownership category, and institution.
How FDIC Insurance Works When It Comes to Living Trusts
When it comes to a living trust (i.e. a trust created while you’re living), FDIC coverage is calculated differently than most people expect.
The same $250,000 limit comes into play for a trust account (i.e. an account titled in the name of the trustee of a trust), but the difference with trusts is the question of to whom the limit applies. That question becomes important when a trust has multiple beneficiaries and any one trust account has over $250,000.
For instance, for the $400,000 trust account you described, let’s say there are two beneficiaries. If viewed as having a single account owner, this trust would be over the $250,000 deposit insurance limit and so $150,000 of it would be uninsured. On the other hand, under the right circumstances the insurance coverage could be applied separately to each beneficiary. That could raise the total potential coverage for the trust to $500,000, meaning that a $400,000 trust account could be completely insured. The way the $250,000 FDIC insurance limit is applied comes down to whether the eligibility for insurance is based just on the trust as a whole, or looks past the owner and is based on the beneficiaries individually.
How FDIC Insurance Works for Revocable and Irrevocable Trusts
Trusts can be revocable or irrevocable. A revocable trust is one that designates beneficiaries who will receive the proceeds of the trust upon the owner’s death if the current conditions of the trust remain the same. In the meantime, the trust can be revoked or have its terms changed by the owner of the trust, who can also use the money in the trust at any time and for any reason. The owner of a revocable trust can also called the “creator,” the “settlor,” the “maker,” or the “grantor.” The settlor of a revocable living trust determines who will be the beneficiaries of the trust after the death of the settlor, but the settlor can change the beneficiaries at any time so long as the settlor is competent.
An irrevocable trust means that the settlor of the trust cannot unilaterally revoke the trust. There are many different types of irrevocable trusts used for many different purposes. With some irrevocable trusts, once money is contributed to the trust, the owner gives up the ability to change the terms of the trust, but with many irrevocable trusts, the creator of the trust retains the right to change the trustees and change the beneficiaries of the trust, and sometimes retains the right to receive income and/or other distributions from the trust. One of the most common types of irrevocable trust is used for Medicaid asset protection and/or veterans pension asset protection, such as our Living Trust Plus® Asset Protection Trust. A revocable trust also becomes an irrevocable trust once the creator(s) pass away because, at that point, there is no longer anyone alive who can revoke the trust.
Both revocable and irrevocable trusts are entitled to FDIC insurance coverage, but the extent of that coverage depends on the nature and number of beneficiary interests.
FDIC Insurance Limits for Revocable Trusts
The FDIC rules explain the insurance limits when the account is in the name of a revocable trust — you can protect up to $250,000 for each revocable trust beneficiary under certain circumstances, up to a maximum of $1,250,000, which contemplates five beneficiaries.
Revocable living trusts typically name as beneficiaries the creator(s) of the trust, and then, after the death of the creator(s), the children of the creator(s) are typically named as the primary beneficiaries. For FDIC purposes, the creators of the trust are treated as the owners of the account. Revocable trusts also often name grandchildren, siblings, parents, and other relatives and friends as beneficiaries or potential beneficiaries, as well as charities. What is important to understand is that the FDIC only looks at the primary beneficiaries at the trust, meaning those beneficiaries who would receive the trust assets upon the death of the creators of the trust. It does not look at secondary beneficiaries, also called contingent beneficiaries, or other remote beneficiaries who might receive assets if one of the primary beneficiaries were to pre-decease the creators of the trust.
Under the FDIC rules, a trust account at one FDIC-insured institution with up to five different primary beneficiaries named in the trust will have FDIC insurance up to $250,000 per beneficiary. In other words, if your revocable trust names your five children as the primary beneficiaries, the FDIC will insure up to $1,250,000 at any one FDIC-insured bank.
If your revocable trust account has more than $1,250,000 or more than five different primary beneficiaries, the FDIC will insure the greater of either: $1,250,000 or the aggregate amount of all the beneficiaries’ interests in the trust, limited to $250,000 per beneficiary.
Joint Revocable Living Trusts
If you have an account for a joint revocable trust, you and your spouse both have $250,000 FDIC insurance per qualifying beneficiary. In other words, a joint trust with five named primary beneficiaries will have $2,500,000 of FDIC coverage (both spouses have $1,250,000 of FDIC insurance — $250,000 each for five beneficiaries).
FDIC Insurance Limits for Irrevocable Trust Accounts
When the primary beneficiaries of an irrevocable trust are clearly identifiable and are entitled to receive their distributions without restrictions upon the death of the Trust Settlor (as is almost always the case with our Living Trust Plus® Asset Protection Trust), then FDIC insurance for an irrevocable trust account works the same as for a revocable trust account. Each beneficiary’s interest in our Living Trust Plus® asset protection trust) is almost always a non-contingent interest, meaning there are no conditions in the trust that the beneficiary would need to meet to receive their allocation under the terms of the trust upon the death of the grantor(s).
However, certain types of irrevocable trust are written very differently than our Living Trust Plus® Asset Protection Trust. If the interest of a beneficiary of an irrevocable trust is “contingent,” all contingent interests are added together and insured up to a maximum of $250,000, regardless of the number of beneficiaries. When the funds in a single irrevocable trust account represent both contingent interests and non-contingent interests, the FDIC will separate the two types of funds before applying the rules described above.
Use FDIC’s Simple Interactive Chart for More Information!
The FDIC offers a simple interactive flowchart for revocable an irrevocable trusts that you can use to find out how your trust accounts at each FDIC insured bank will be insured.
Plan in Advance for Your Future and Your Loved Ones
There is no better time than now to begin your estate planning or make updates to existing documents, if they are needed! Here at the Farr Law Firm, we have strategies to help everyone plan in advance for themselves and for their loved ones. With advance planning, each person can retain the income and assets it has taken a lifetime to accumulate, and provide themselves the peace of mind that they are prepared should something happen to them or their loved one. If you or your loved ones have not done Incapacity Planning or Estate Planning, or if a loved one needs nursing home care or even if your loved one is already in a nursing home, please contact us as soon as possible to make an appointment for an initial consultation:
About Evan H Farr, CELA, CAP
