Q: What are FDIC insurance levels for trust accounts? In my case, if you have $500,000 in a trust account (owned by one trustee but left to two adult children), is that account covered for $500,000 by FDIC?
A: The key to this question is how FDIC deposit insurance coverage limits apply given the number and the nature of beneficiary interests in the trust.
Deposit Insurance Coverage Limits
The starting point for this discussion is the standard FDIC insurance limit. That limit also applies to trust accounts, but the wrinkle with trusts is the question of to whom the limit applies - the account owner, or the beneficiaries of the trust.
The standard FDIC insurance limit is $250,000 per depositor at any FDIC-insured institution. This insurance will cover any money the depositor has at a bank that fails, to the extent that the bank cannot cover those deposits from its remaining resources.
In your case, the tricky part is whether this insurance limit applies to you or your two beneficiaries. With $500,000 in your trust, you would be over the limit if it applied just to you.
On the other hand, with two beneficiaries, the insurance coverage could be split between them - but only under the right circumstances.
The extent to which deposit insurance looks past the account owner and is based on beneficiary interests depends on how the account is set up.
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; 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.
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 change the terms of the trust.
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.
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.
How Beneficiary Interests Affect FDIC Coverage Limits
In both revocable and irrevocable trusts, beneficiary interests may be defined as being contingent on certain conditions being met. This is central to how FDIC insurance coverage limits are applied.
If beneficiary interests are defined as contingent, meaning that those beneficiaries would have to meet certain conditions to benefit from the trust, those interests are not separately covered by FDIC insurance. In that case, insurance coverage would apply to the account owner, not to the contingent beneficiaries.
However, if beneficiary interests are non-contingent, meaning that as things stand now the beneficiaries are entitled to benefit from the trust when the owner dies, then FDIC insurance applies separately to each non-contingent beneficiary interest.
Where there are non-contingent beneficiaries, the extent of the trust's deposit insurance coverage is dependent upon the number of those non-contingent beneficiaries. Each one is separately entitled to up to $250,000 in FDIC insurance coverage.
So, to use your trust as an example, if your two sons' beneficiary interests are contingent, then your trust's insurance coverage would be based on your ownership of the account and thus limited to $250,000.
If your two sons' beneficiary interests are non-contingent, then each is separately entitled to up to $250,000 of deposit insurance coverage, which would increase the overall coverage of your trust.
Making Sure of Deposit Insurance Coverage for Your Trust
Obviously, there are some twists to determining FDIC insurance for trust accounts. The following steps can help you be more certain of your coverage:
1. Be sure to deposit your trust with an FDIC-insured institution
The FDIC logo should be clearly displayed at your bank branch and on their website. You can also check for FDIC insurance coverage by checking the "Bank Find" feature on the FDIC website.
2. Put your trust in a covered type of account
Just because your trust is administered by a bank does not mean it is covered by FDIC insurance. Only deposit accounts like savings, money market and CD accounts are covered; investment accounts are not.
3. See that the names of all beneficiaries are clearly stated in the trust document
In order for FDIC insurance to apply to beneficiaries, the interest those beneficiaries have in the trust must be clearly defined in the trust document.
4. Consider whether beneficiary interests are contingent
If a beneficiary has to meet certain conditions in order to qualify for an interest in the trust, that beneficiary's interest is considered to be contingent and FDIC insurance will not apply separately to that interest.
5. Factor in other beneficiary accounts with the bank
Remember, each depositor only gets $250,000 worth of coverage at any given bank, and that applies across all of that depositor's accounts at that bank. So, if your beneficiaries have their own accounts at the bank, work with them to make sure that the total value of these accounts plus their interest in the trust does not exceed $250,000.
6. Consult with your banker or trust advisor as to the trust's deposit-insurance coverage
When it comes to interpreting rules like this, it always helps to get expert advice. Work with someone who can apply relevant experience to your specific information.
7. Go to the source for more information
To explore more details about how FDIC insurance coverage relates to trusts, see the FDIC web page on this subject.
FDIC insurance can provide crucial protection when banks fail. Setting up a trust is one way to provide for the future of your beneficiaries. Checking up on the FDIC insurance of your trust can help make sure those plans are secure.