INTRODUCTION

The FDIC (Federal Deposit Insurance Corporation) is an independent agency of the United States government that protects you against the loss of your insured deposits if an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.

FDIC deposit insurance covers the depositors of a failed FDIC-insured depository institution dollar-for-dollar, principal plus any interest accrued or due to the depositor, through the date of default, up to at least $250,000. For example, if a person had a CD account in her name alone with a principal balance of $195,000 and $3,000 in accrued interest, the full $198,000 would be insured, since principal plus interest did not exceed the $250,000 insurance limit for single ownership accounts.

Though unlikely, bank failures do occur and the FDIC responds in two capacities. First, as the insurer of the bank's deposits, the FDIC pays insurance to depositors up to the insurance limit. Historically, the FDIC pays insurance within a few days after a bank closing, usually the next business day, by either (1) providing each depositor with a new account at another insured bank in an amount equal to the insured balance of their account at the failed bank, or (2) by issuing a check to each depositor for the insured balance of their account at the failed bank.

Some deposits that exceed $250,000 and are linked to trust documents or deposits established by a third party broker may have a short wait so that their accounts can be reviewed to determine the amount of deposit insurance coverage available to them. The amount of time involved depends on how long it takes for the depositor to provide supplemental information to the FDIC so that we can complete the insurance determination.

Second, as the receiver of the failed bank, the FDIC assumes the task of selling/collecting the assets of the failed bank and settling its debts, including claims for deposits in excess of the insured limit. If a depositor has uninsured funds they receive the insured portion of their funds quickly, as described above. They may also, however, recover some portion of their uninsured funds (their remaining claim on the failed bank) from the proceeds from the sale of failed bank assets. It can take several years to sell off the assets of a failed bank. As assets are sold, however, depositors who had uninsured funds usually receive periodic payments (on a pro-rata "cents on the dollar" basis) on their remaining claim.

Depositors do not need to apply for FDIC insurance. Coverage is automatic whenever a deposit account is opened at an FDIC-insured bank. If you want your funds insured by the FDIC, simply make sure you are placing your funds in a deposit account at an FDIC-insured bank and that your deposit does not exceed the insurance limit for that ownership category.

HOW DOES THIS APPLY TO BANK ACCOUNTS OWNED BY A TRUST?

That is the question of the day.  First, the answer depends on whether the trust is revocable or irrevocable.

ACCOUNTS HELD BY REVOCABLE TRUSTS

A revocable trust account is a deposit account owned by one or more people that identifies one or more beneficiaries who will receive the deposits upon the death of the owner(s). A revocable trust can be revoked, terminated or changed at any time, at the discretion of the owner(s). The term “owner” means the grantor, settlor, or trustor of the revocable trust.

When calculating deposit insurance coverage, the designation of trustees, co-trustees and successor trustees is not relevant. They are administrators and are not considered in calculating deposit insurance coverage. This ownership category includes both informal and formal revocable trusts:

• Informal revocable trusts—often called payable on death, Totten trust, in trust for, or as trustee for accounts—are created when the account owner signs an agreement, usually part of the bank's signature card, directing the bank to transfer the funds in the account to one or more named beneficiaries upon the owner's death.

• Formal revocable trusts—known as living or family trusts— are written trusts created for estate planning purposes.  These types of trusts are usually drafted by an attorney.

The owner controls the deposits and other assets in the trust during his or her lifetime. The agreement establishes that the deposits are to be paid to one or more identified beneficiaries upon the owner's death. The trust generally becomes irrevocable upon the owner's death.

COVERAGE AND REQUIREMENTS FOR REVOCABLE TRUST ACCOUNTS

In general, the owner of a revocable trust account is insured up to $250,000 for each unique beneficiary, if all of the following requirements are met:

1. The account title at the bank must indicate that the account is held pursuant to a trust relationship. This rule can be met by using the terms payable on death (or POD), in trust for (or ITF), as trustee for (or ATF), living trust, family trust, or any similar language, including simply having the word “trust” in the account title. The account title includes information contained in the bank's electronic deposit account records.

2. The beneficiaries must be named in either the deposit account records of the bank (for informal revocable trusts) or identified in the formal revocable trust document. For a formal trust agreement, it is acceptable for the trust to use language such as “my issue” or other commonly used legal terms to describe the designated beneficiaries, provided the specific names and number of eligible beneficiaries can be determined.

3. To qualify as an eligible beneficiary, the beneficiary must be a living person, a charity or a non-profit organization. If a charity or non-profit organization is named as beneficiary, it must qualify as such under Internal Revenue Service (IRS) regulations.

An account must meet all of the above requirements to be insured under the revocable trust ownership category. Typically, if any of the above requirements are not met, the entire amount in the account, or the portion of the account that does not qualify, is added to the owner's other single accounts, if any, at the same bank and insured up to $250,000. If the trust has multiple co-owners, each owner's share of the non-qualifying amount would be treated as his or her single ownership account.

Insurance coverage for revocable trust accounts is calculated differently depending on the number of beneficiaries named by the owner, the beneficiaries' interests and the amount of the deposit.

Two calculation methods are used to determine insurance coverage of revocable trust accounts: one method is used only when a revocable trust owner has five or fewer unique beneficiaries; the other method is used only when an owner has six or more unique beneficiaries. If a trust has more than one owner, each owner's insurance coverage is calculated separately.

REVOCABLE TRUST INSURANCE COVERAGE – FIVE OR FEWER UNIQUE BENEFICIARIES

When a revocable trust owner names five or fewer beneficiaries, the owner's trust deposits are insured up to $250,000 for each unique beneficiary. This rule applies to the combined interests of all beneficiaries the owner has named in all formal and informal revocable trust accounts at the same bank. When there are five or fewer beneficiaries, maximum deposit insurance coverage for each trust owner is determined by multiplying $250,000 times the number of unique beneficiaries, regardless of the dollar amount or percentage allotted to each unique beneficiary. Therefore, a revocable trust with five unique beneficiaries is insured up to $1,250,000.

REVOCABLE TRUST INSURANCE COVERAGE - SIX OR MORE UNIQUE BENEFICIARIES

Equal Beneficial Interests

When a revocable trust owner names six or more unique beneficiaries, and all the beneficiaries have an equal interest in the trust (i.e., every beneficiary receives exactly the same amount), the insurance calculation is the same as for revocable trusts that name five or fewer beneficiaries. The trust owner receives insurance coverage up to $250,000 for each unique beneficiary. With one owner and six beneficiaries, with equal beneficial interests, the owner's maximum insurance coverage is up to $1,500,000. 

Unequal Beneficial Interests

When a revocable trust owner names six or more beneficiaries and the beneficiaries do not have equal beneficial interests (i.e., they receive different amounts), the owner's revocable trust deposits are insured for the greater of either: (1) the sum of each beneficiary's actual interest in the revocable trust deposits up to $250,000 for each unique beneficiary, or (2) a minimum coverage amount of $1,250,000. Determining insurance coverage of a revocable trust that has six or more unique beneficiaries whose interests are unequal can be complex. For information on coverage beyond the minimum coverage amount of $1,250,000 per owner, contact the FDIC for assistance using the contact form available here.

Life Estate Interests

An owner who identifies a beneficiary as having a life estate interest in a formal revocable trust is entitled to insurance coverage up to $250,000 for that beneficiary. A life estate beneficiary is a beneficiary who has the right to receive income from the trust or to use trust deposits during the beneficiary's lifetime, where other beneficiaries receive the remaining trust deposits after the life estate beneficiary dies. For example: A husband is the sole owner of a living trust that gives his wife a life estate interest in the trust deposits, with the remainder going to their two children upon his wife's death. Maximum insurance coverage for this account is calculated as follows: $250,000 times three different beneficiaries equals $750,000.

ACCOUNTS HELD BY IRREVOCABLE TRUSTS

Irrevocable trust accounts are deposit accounts held in connection with a trust established by statute or a written trust agreement in which the owner (also referred to as a grantor, settlor or trustor) contributes deposits or other property to the trust and gives up all power to cancel or change the trust. An irrevocable trust also may come into existence upon the death of an owner of a revocable trust. A revocable trust account that becomes an irrevocable trust account due to the death of the trust owner may continue to be insured under the rules for revocable trusts. Therefore, in such cases, the rules in the revocable trust section may be used to determine coverage. The interests of a beneficiary in all deposit accounts under an irrevocable trust established by the same settlor and held at the same insured bank are added together and insured up to $250,000, only if all of the following requirements are met:

• The trust must be valid under state law

• The insured bank's deposit account records must disclose the existence of the trust relationship

• The beneficiaries and their interests in the trust must be identifiable from the bank's deposit account records or from the trustee's records

The amount of each beneficiary's interest must not be contingent as defined by FDIC regulations If the owner retains an interest in the trust, then the amount of the owner's retained interest would be added to the owner's other single accounts, if any, at the same insured bank and the total insured up to $250,000. For example, if the grantor of an irrevocable trust is still living, and the trust provides that trust assets can either be used by the grantor or by a trustee on behalf of the grantor, the grantor would be deemed to have a retained interest. Thus, this irrevocable trust account would not be insured under the irrevocable trust ownership category, but as a single ownership deposit of the grantor. The balance of the account would be added together with any other single ownership accounts the grantor has at the same bank, and the total would be insured up to $250,000.

Since irrevocable trusts usually contain conditions that affect the interests of the beneficiaries or provide a trustee or a beneficiary with the authority to invade the principal, insurance coverage for an irrevocable trust account usually is limited to $250,000, regardless of the number of beneficiaries designated. However, the non-contingent interests of a beneficiary in all irrevocable trusts established by the same owner and held at the same bank are added together and insured up to $250,000.