Q: If you have $500,000 in a trust account (owned by one trustee but which is left to two adult children), is that account covered for $500,000 by FDIC?
A: The key to this question about Federal Deposit Insurance Corporation insurance is whether the trust is revocable or irrevocable. More than anything else, that determines the extent of FDIC insurance coverage for multi-beneficiary trust accounts.
Revocable vs. irrevocable trusts
Trusts can be revocable or irrevocable, and it's important to understand the difference.
- Revocable trust
A revocable trust is one that designates beneficiaries who will receive the proceeds of the trust upon the owner's death, but in the meantime the trust can be terminated or have its terms changed by the owner. One way to think of this is that owners of revocable trusts have prescribed what will happen to the money after they die, but reserve the right to change their minds.
A revocable trust may become an irrevocable trust once the owner dies because effectively there is no longer an option to cancel or change the trust.
- Irrevocable trust
An irrevocable trust also has designated beneficiaries but is not subject to change. Once money is contributed to an irrevocable trust, the owner gives up all rights to cancel or modify the terms of the trust.
FDIC insurance limits for trusts
Coverage for revocable and irrevocable trusts is based on FDIC insurance limits of up to $250,000. What varies is how many people to which that limit applies.
- Revocable trust and FDIC coverage
In a revocable trust, the owner is considered the depositor and the account is only eligible for $250,000 of FDIC insurance coverage. However, if a bank fails after a trust owner has died but before the trust has been paid out or deemed to be an irrevocable trust, the beneficiaries are considered the depositors and each is entitled to $250,000 in coverage.
- Irrevocable trust and FDIC coverage
In an irrevocable trust, the beneficiaries are considered to be the depositors even before the owner dies, as long as there are no conditions the beneficiaries have to meet to remain eligible for trust proceeds. If that is the case, each beneficiary would be eligible for $250,000 in FDIC insurance coverage. However, trusts are often based on contingent interests, which means that there are conditions the beneficiary has to meet in order to be eligible for trust proceeds. In that case, FDIC insurance is based on the trust as a whole, with a maximum of $250,000.
In effect, the insurance coverage in each case is allocated according to how many people have a right to the proceeds of the account. The living owner of a revocable trust still has control over the account and so is only eligible for $250,000 in coverage regardless of how many beneficiaries there are. Once a trust becomes irrevocable, as long as there are no conditions, the beneficiaries have the rights to the proceeds of the account and so each is eligible for $250,000 in coverage.
There is a useful reference on the FDIC website that can help you trace through how all this applies to your situation. Naturally, any insurance coverage depends on the trust being deposited in an eligible account at an FDIC-participant institution.
Comment: Do you have trust accounts for your children?
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