FDIC Limits: What is FDIC Coverage for Trusts
The topic of FDIC (Federal Deposit Insurance Corporation) limits is something that no one cares about until they do. The FDIC limits refer to how much of your money is insured if the bank goes out of business. This topic is a growing concern due to the recent failures of two major regional banks in the US. In March 2023, the Silicon Valley Bank and Signature Bank closed. These bank failures have been the largest since the failure of Washington Mutual in 2008.
In this article, we delve into FDIC coverage for trusts. Well-known FDIC deposit insurance limits for personal bank deposits are different from the FDIC insurance for trust accounts. It is important to understand at least the basics of this coverage to ensure that your trust’s assets are protected.
Trust Basics You Need to Know
The FDIC insurance trust account limits depend on you knowing some essential trust vocabulary. So, let’s start with some trust basics.
The maker of the trust is called the trustor, sometimes called the grantor or settlor. The manager of the trust is called the trustee. The beneficiaries of the trust are the named heirs.
Next, the FDIC limits depend on whether your trust is a revocable or irrevocable trust. A revocable trust means that you can make changes to it, while irrevocable means you cannot make changes. When the trustor dies, a revocable trust becomes irrevocable. If you’re not sure which one your trust is, ask your estate planning attorney or give us a call and we can help.
FDIC Revocable Trust Coverage
A revocable trust is the main type of trust that most people choose for estate planning purposes. Revocable trusts can be revoked, i.e., made invalid, terminated, or changed by the trustor.
Deposit accounts owned by a revocable trust can be formal like a Living or Family Trust or informal like an ITF (In Trust For) or POD account (Payable on Death). These trust accounts assign beneficiaries which can be living people, charities, or non-profit organizations. Bank records and trust documents must specify and name these trust beneficiaries.
Under current FDIC insurance rules, the FDIC coverage limit for all the trust accounts of the trustor in one bank is up to $250,000 per beneficiary. This applies if the trust has 5 or fewer beneficiaries.
For trust accounts with 6 or more beneficiaries, the coverage limit depends on whether the beneficiaries have equal or unequal interest in the trust. If the trust beneficiaries have equal interests in the trust, they have a maximum insurance coverage of $250,000 each.
If the beneficiaries have unequal interests in the trust, the FDIC limits become more complex. In this case, the owner's revocable trust funds are insured for the greater of either:
The sum of each beneficiary's actual interests up to $250,000 for each unique beneficiary, OR
A minimum coverage amount of $1,250,000.
FDIC Irrevocable Trust Coverage
An irrevocable trust is when the trustor contributes their deposits and other assets into the trust and gives up all the power to cancel or change it. The FDIC sets out the following requirements for ensuring irrevocable trusts:
The trust must be valid under state law.
The bank’s deposit records disclose that such a trust relationship exists.
The bank’s deposit records or trustee’s records identify the beneficiaries and their interests in the trust.
Each beneficiary’s interest is a non-contingent interest, meaning there are no conditions that the beneficiary would need to meet to receive their allocation upon the death of the trustor
If all four requirements are met, each beneficiary’s interest is insured up to $250,000. Most irrevocable trusts have contingent interest, which is why deposit insurance for most irrevocable trusts is capped at $250,000 at each FDIC-insured bank.
FDIC Coverage for Trusts Changing in 2024
The FDIC has made amendments to the insurance limits for trust accounts which will be effective on April 1, 2024. These amendments aim to simplify the insurance coverage for trust accounts by merging the coverage categories for a revocable trust and irrevocable trust into one category.
Under this merged “Trust Accounts” category, the FDIC will issue a new simplified calculation for deposit insurance coverage. In fact, it will make calculating deposit insurance much easier:
Each grantor’s trust deposits will be insured in an amount up to the standard maximum deposit insurance amount (currently $250,000) multiplied by the number of trust beneficiaries, not to exceed five.
This, in effect, will limit coverage for a grantor’s trust deposits at each bank to a total of $1,250,000; in other words, maximum coverage of $250,000 per beneficiary for up to five beneficiaries.
My Final Take on FDIC Limits
Knowing that there are limits to what the FDIC can cover in case your bank fails is essential when managing your trust accounts. Understanding the FDIC insurance coverage for trusts helps you ensure you have complete coverage and protection for your assets.
The key takeaways from the example set by this year’s bank failures are:
Spread out your money - Make sure that you are not holding too much in one place.
Reconsider your banks - Smaller banks may have a higher risk. If you are holding amounts over the limit at smaller banks, it may be time to transfer or distribute these amounts to other banks.
Get an experienced trust administration attorney - They will act on your and your beneficiaries’ interests, providing guidance to ensure the protection and management of your assets.
If you have further questions on trust accounts and FDIC insurance for trust accounts, we’re here to help. Click here to learn more about our trust administration services, or give us a call today to schedule a free Family Administration Session and get all of your questions answered.
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