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Introduction
The shocking failures of Silicon Valley Bank and Signature Bank highlighted the need of protecting one’s hard-earned money.
The Federal Deposit Insurance Corporation (FDIC) provides depositors with a safety net by insuring their funds if their banks fail. Notably, in these recent cases, the FDIC took the unprecedented step of covering all depositors, even beyond the standard $250,000 limit per depositor.
With the financial landscape in flux, many Americans want to know how the FDIC can protect their funds.
But what about those who have created revocable or irrevocable trusts as part of their estate planning? As it turns out, using a trust can help protect even larger sums of money.
Keep reading to gain valuable insights on FDIC coverage for revocable and irrevocable trusts, as well as crucial nuances that depositors should be aware of.
1. Understanding FDIC Insurance
Brief history and purpose of FDIC
The Federal Deposit Insurance Corporation (FDIC) was established in 1933 as part of the Banking Act, a response to the widespread bank failures during the Great Depression. Thousands of banks had failed, eroding public trust in the financial system and resulting in a devastating loss of personal savings. The FDIC was created to restore trust in the banking system and to provide depositors with a safety net by insuring their deposits against bank failures.
Over the years, the FDIC has evolved to become an important component of the United States’ financial regulatory framework. Its primary mission is to maintain stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions for safety and soundness, and managing receiverships in case of bank failures. The FDIC discourages bank runs by providing deposit insurance. A bank run occurs when a large number of depositors withdraw their money at the same time due to concerns about the bank’s financial stability. Today, the FDIC insures deposits at more than 5,000 banks and savings institutions, ensuring that depositors’ hard-earned money is protected in the event of a bank failure.
Types of accounts covered by FDIC insurance
The FDIC insures various deposit accounts held at FDIC-insured banks and financial institutions. While there are 14 different account ownership categories, each with separate insurance coverage, the types of accounts within these categories include checking accounts, savings accounts, money market deposit accounts (MMDAs), and certificates of deposit (CDs).
Depositors’ funds in these accounts are insured by the FDIC up to the standard maximum deposit insurance amount (SMDIA) of $250,000 per depositor, per insured bank, for each account ownership category, with the notable exception of revocable/irrevocable trusts, which we will discuss later.
The 14 account ownership categories covered by FDIC insurance are:
(https://www.fdic.gov/resources/deposit-insurance/diguidebankers/account-ownership/index.html)
- Individual Accounts
- Joint Accounts
- Certain Retirement Accounts (e.g., IRAs, self-directed plans, and Keogh accounts)
- Revocable Trust Accounts
- Irrevocable Trust Accounts
- Employee Benefit Plan Accounts
- Corporation/Partnership/Unincorporated Association Accounts
- Government Accounts
- Mortgage Servicing Accounts
- Non-Qualified Annuity Contract Residual Interest Accounts
- Custodian Accounts for Native Americans
- Public Bond Accounts
- Statutory Trust Accounts
- Annuity Contract Accounts
It is important to note that FDIC insurance does not cover all financial products. Non-deposit investment products such as stocks, bonds, mutual funds, life insurance policies, annuities, and municipal securities are not insured by the FDIC. Furthermore, the FDIC does not insure the contents of safe deposit boxes or losses caused by theft or fraud. The FDIC also does not insure US Treasury securities held at an insured bank, even though they are backed by the full faith and credit of the US government.
Standard maximum deposit insurance amount (SMDIA)
The standard maximum deposit insurance amount (SMDIA) refers to the maximum dollar amount the FDIC insures for a depositor at a single FDIC-insured bank, per account ownership category.
The SMDIA was permanently increased to $250,000 from $100,000 with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010.
The SMDIA applies separately to each account ownership category, which means that depositors can have more than $250,000 insured at the same bank if their funds are in different ownership categories. For example, a depositor could have $250,000 insured in a single account, another $500,000 ($250,000 for each spouse) insured in a joint account with a spouse, and an additional $250,000 insured in a revocable trust account. In this scenario, because the funds are spread across three different account ownership categories, the depositor would have a total of $750,000 insured at the same bank in this scenario.
2. FDIC Insurance for Revocable and Irrevocable Trusts
Definition of revocable and irrevocable trusts under FDIC rules
Revocable Trusts: Under FDIC rules, a revocable trust is a legal arrangement in which the trust creator, also known as the grantor or settlor, retains control over the trust assets and can modify or terminate the trust during their lifetime. Revocable trusts, often called living trusts, are established to manage the grantor’s assets during incapacity and provide for their distribution to designated beneficiaries upon the grantor’s death. A revocable trust allows the grantor to change beneficiaries, add or remove assets, or revoke the trust entirely. For FDIC insurance purposes, revocable trusts are further classified as informal (also known as payable-on-death or POD accounts) or formal (such as living trusts with a written trust agreement).
Irrevocable Trusts: An irrevocable trust, on the other hand, is a legal arrangement in which the grantor relinquishes control over the trust assets and cannot modify or terminate the trust without the beneficiaries’ consent. When assets are transferred to an irrevocable trust, they become the trust’s property and are managed by a trustee in accordance with the trust agreement. Irrevocable trusts are used for a variety of purposes, including estate planning, tax planning, and asset protection. For FDIC insurance coverage, an irrevocable trust account must have a written trust agreement in order to be insured by the FDIC.
Beginning April 1, 2024, the FDIC will apply the same coverage rules for revocable and irrevocable trusts, unifying the two categories into a single category termed “trusts accounts.” This article will describe the new rule’s coverage. (See further HERE) Under current rules, coverage is calculated differently for revocable and irrevocable trusts. Revocable trusts are also exempt from the next year’s five-beneficiary limit, which will be examined further below.
Coverage limits and calculation for trust accounts
For trust accounts, the FDIC insurance coverage is determined on a per-beneficiary basis. The standard maximum deposit insurance amount (SMDIA) of $250,000 is applied to each unique beneficiary named in the trust who are entitled to the trust funds upon the death of the trust owner, up to a maximum of five beneficiaries (or $1,250,000 total). This means that the total coverage for a trust account depends on the number of beneficiaries and their respective interests in the trust.
For example, if a revocable trust names two beneficiaries, the trust account would be eligible for up to $500,000 in FDIC insurance coverage ($250,000 per beneficiary). Similarly, a revocable trust with four beneficiaries would be eligible for up to $1,000,000 in coverage ($250,000 per beneficiary).
FAQ: What if the same trust owner has both revocable and irrevocable trust accounts at the same bank?
The coverage for both types of trust accounts does not overlap, allowing the trust owner to maximize FDIC insurance protection for their assets held in different trust arrangements at the same bank.
If the same trust owner has both revocable and irrevocable trust accounts at the same FDIC-insured bank, the coverage for each account is calculated separately, as they belong to distinct account ownership categories. The combined balance of the revocable trust accounts is insured up to $1,250,000 depending on the number of beneficiaries, and the combined balance of the irrevocable trusts is separately insured up to $1,250,000, for the total of $2,500,000.
FAQ: What if I have a joint trust with my spouse?
When a joint trust is established with a spouse, the FDIC insurance coverage is calculated on a per-beneficiary basis, similar to individual revocable trusts. Each spouse is treated as a separate trust owner. As a result, the joint trust’s total coverage for the joint trust is calculated as 2 x the number of beneficiaries. For example, if a joint trust has 4 beneficiaries, the FDIC insurance limit is 2x 4x $250,000, or $2,000,000.
FAQ: What if my trust provides for my spouse after my death, then trust assets go to my children after my spouse’s death?
In a situation where your trust provides for your spouse after your death and subsequently passes the trust assets to your children upon your spouse’s death, the FDIC insurance coverage for the trust depends on the trust’s specific terms. If your trust is structured as a revocable trust and clearly identifies both your spouse and children as beneficiaries, the FDIC would insure the deposits on a per-beneficiary basis. In this case, the coverage would be up to $250,000 for each unique beneficiary (your spouse and each child).
Insurance eligibility requirements for trust accounts
Proper account titling
To be eligible for FDIC insurance, a trust account must be properly titled, indicating that it is held in trust. The title should reflect the testamentary intent of the owner, and this requirement is easily met by using a term such as “living trust,” “family trust,” “revocable trust,” or “trust” in the account title. Additional information in the title, such as the names of trustees and the date of the trust creation, is acceptable but unnecessary for FDIC insurance purposes.
Identification of beneficiaries
Beneficiaries must be clearly identifiable from the trust documents in order for trust accounts to be eligible for FDIC insurance. Beneficiaries can be named directly in the trust agreement or through a separate document that is incorporated by reference, such as a payable-on-death (POD) account. Beneficiaries must be specifically named individuals or entities, such as charities, with ascertainable interests in the trust, according to the FDIC.
It is not necessary to identify the beneficiaries by name in the trust agreement, but the designation must be specific enough to clearly identify the intended beneficiary, for example, “to my children and grandchildren.” Furthermore, designations like “my issue” or “descendants per stirpes” are acceptable.
FAQ: Do I need to provide a copy of the trust document to the bank for FDIC insurance?
While naming an account under a trust is acceptable for deposit insurance purposes, a bank is not required to keep a copy of the trust agreement to insure the funds of the trust account.
Some banks may keep copies of specific pages or the entire agreement for its own business purposes. Should your bank fail, the FDIC will request a copy of the agreement from the trustee or grantor of the trust in order to determine coverage.
3. Tips for Maximizing FDIC Insurance Coverage
Spreading assets across multiple banks
One effective strategy to maximize your FDIC insurance coverage is to spread your assets across multiple banks. You can take advantage of the standard $250,000 insurance limit per depositor, per insured bank, for each account ownership category by doing so. For example, if you have $500,000 in savings, you can split it between two banks to ensure that each account is fully insured by the FDIC.
Utilizing different account ownership categories
Using different account ownership categories is another way to maximize your FDIC coverage. The FDIC insures different types of accounts, such as single accounts, joint accounts, business accounts, and trust accounts, separately. You can increase your insurance coverage by diversifying your account ownership categories. For example, a married couple could have a joint account and two individual accounts, giving them $1,000,000 in FDIC coverage at a single bank.
Take advantage of the increased coverage for trust accounts
As discussed in this article, trust accounts have a higher coverage amount based on a number of beneficiaries over the standard $250,000 insurance limit. Having funds in trust accounts can significantly increase the amount insured by the FDIC. Assume that a married couple with two children has an irrevocable insurance trust and a revocable living trust account for each spouse. Each trust has three beneficiaries (a spouse and two children), with an insured deposit of $250,000 multiplied by three equals $750,000. In addition to the insured amount in their personally owned accounts, the FDIC will now insure 4 trusts x $750,000 = $3,000,000 more.
FAQ: Does the FDIC insure deposits owned by a foreigner?
Foreigners’ deposits are insured by the FDIC in the same way that US residents’ deposits are, as long as they are held in FDIC-insured banks. The primary goal of FDIC insurance is to maintain the financial system’s stability and public trust in U.S. banking institutions, and this goal applies to both domestic and foreign depositors.
FAQ: Does the FDIC insure deposits at foreign branches of US banks?
Deposits held at foreign branches of US banks are not insured by the FDIC. Deposits made within the United States and its territories are insured by the FDIC, but deposits made outside of these jurisdictions are not. Depositors should be aware that funds held in foreign branches of US banks may be subject to the host country’s laws and regulations, and any deposit insurance available would be dependent on the local deposit insurance schemes, if any, provided by the country where the foreign branch is located.
Conclusion
Well-drafted revocable and irrevocable trusts are like the secret sauce of estate planning, providing a compelling mix of benefits, including smoother wealth transfer, asset protection and potential tax advantages.
But hold on, there’s more! Trust structures also serve up an extra helping of FDIC insurance coverage when set up just right. By allocating funds to various beneficiaries in separate trust accounts, depositors can effectively increase their FDIC insurance coverage, ensuring that their hard-earned wealth remains secure and accessible to their intended beneficiaries.
The combination of trust structures and FDIC insurance offers a comprehensive and reliable approach to managing one’s assets and preserving their financial legacy for future generations.
This blog post is written for educational and general information purposes only, and does not constitute specific legal advice. You understand that there is no attorney-client relationship between you and the blog publisher. This blog should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.
Thank you for preparing this most informative article. I have been practicing as an estate planning attorney for 30 years and was not fully aware of all the points this article made.