FDIC insurance is an important element of bank safety. The Federal Deposit Insurance Commission (FDIC) is an independent agency that protects depositors against losses when an insured bank fails. The recent uptick in large bank failures may have had you double checking that your accounts are insured by the FDIC. In times of economic insecurity our first instinct is often to check our personal accounts, but the FDIC also insures trust accounts. For a personal account, FDIC coverage is relatively simple. The FDIC insures personal accounts up to $250,000. Coverage limits on trust accounts are a little more complicated. If you’re the owner of a trust, read on to find out how to calculate your coverage limits and how those coverage limits are changing.
Revocable Trust Accounts
A revocable trust account is a testamentary deposit account. This means that upon the death of the owner(s), the funds in the account will pass to one or more of the named beneficiaries. Like the name suggests, the owner of the trust can amend, revoke, or terminate a revocable trust. The FDIC recognizes two types of revocable trusts– informal revocable trusts (aka Totten trusts) and formal revocable trusts (aka living trusts). Regardless of the type of revocable trust account, the FDIC applies the same set of regulations to calculate insurance coverage.
FDIC insures revocable trust accounts as long as they meet three requirements. First, the title of the trust must reflect the testamentary intent. Second, the IDI’s account record or the trust agreement must reflect the specific names of the beneficiaries. Finally, the beneficiaries must be “eligible” beneficiaries meaning they must be either a person or an IRS-recognized charitable organization or non-profit entity.
Generally, each owner of the revocable trust account is insured up to $250,000 per each eligible, primary beneficiary. The exact amount depends on the number of beneficiaries. To find the coverage amount of an account with five or less beneficiaries, you multiply the number of owners by the number of beneficiaries by $250,000. For example, if a revocable trust has one owner and four primary beneficiaries, FDIC insures up to $1,000,000 (1 x 4 x $250,000).
When the number of beneficiaries is greater than five, coverage can exceed $1,250,000 but the calculation is more complicated. To calculate coverage the FDIC allocates the funds each beneficiaries according to the trust agreement first. Then, the FDIC applies the insurance limit to each beneficiary’s interests.
Irrevocable Trust Accounts
An irrevocable trust account is a deposit account held by an irrevocable trust. Creators of an irrevocable trust are called grantors. While grantors contribute funds or property to the trust, the main feature of an irrevocable trust is that the grantor cannot revoke or amend the trust agreement.
The FDIC insures irrevocable trust accounts that are valid under state law, titled in the name of the trust, and that disclose the identities and interests of the beneficiaries in the trust agreement.
Irrevocable trust accounts that meet these requirements are insured up to $250,000 for the “non-contingent trust interest” of each beneficiary. For example, if your irrevocable trust account has three beneficiaries with non-contingent trust interests, the account has coverage up to $750,000.
In order for an interest to be “non-contingent” the interest must not be conditioned on some other event. For example, if the trust agreement says that a beneficiary will not receive funds until she graduates high school, that would be a contingent interest. Another example of a contingent interest is if the trust’s terms give a trustee discretion to allocate funds among beneficiaries.
Contingent interests are still insured, but only up to $250,000 in the aggregate. For example, let’s say we have a scenario where a trust account has three beneficiaries. The terms of the trust give the trustee discretion to allocate the funds as they see fit. In this scenario, the irrevocable trust account would only have coverage up to $250,000. Even though there are three beneficiaries, because the beneficiaries’ interests are contingent, their interests have coverage up to $250,000 up altogether.
Starting on April 1, 2024, the FDIC will be implementing a new rule for all trust accounts. This new rule is meant to simplify calculating insurance coverage for trust accounts.
The New Rule
So, what exactly is changing? Well, the first major change is that the FDIC combined the categories of irrevocable and revocable trusts. The combined categories are now a one category called “trust accounts.” Under this trust account category, each trust owner has coverage up to $250,000 per eligible primary beneficiary, up to a maximum of five beneficiaries. To be eligible the primary beneficiary must be a living person or an IRS-recognized charity or non-profit.
The new trust account insurance coverage calculation is the same calculation the FDIC currently uses for a revocable trust with five or fewer beneficiaries. Each owner has coverage up to $250,000 per eligible primary beneficiary (up to five). Let’s say a revocable trust has one owner and four primary beneficiaries. In this example the owner has coverage up to $1,000,000 (1 x 4 x $250,000).
Another consideration is if an owner has multiple trust accounts at the same bank. Under the old rule owners calculate their coverage limits separately for each account. The FDIC combines the balances of the accounts and calculate the coverage limit together.
For example, let’s say a person owns a revocable trust with three eligible, primary beneficiaries. The same person owns an irrevocable trust with two primary eligible beneficiaries at the same insured bank. This owner has coverage for the total of both accounts up to $1,250,000. This is true regardless of which trust account holds the majority of that balance.
These new changes take effect soon. Make sure you should review what banks hold your trust accounts, how much is in them, and their coverage limits.