Maximizing Your Protection: Additional FDIC Insurance Coverage for Revocable Trust Accounts

By: Alexandra A. Henson

The recent failures of Silicon Valley Bank and Signature Bank have shaken the public’s trust in financial institutions. Many people are paying renewed attention to the coverage provided to their bank accounts by the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent U.S. government agency which provides deposit insurance to protect depositors in case of bank failure. The FDIC insures up to $250,000 per depositor, per insured bank, for each category of account that an individual owns (i.e., deposit account, CD, investment account, etc.). This means that if you have multiple accounts at one bank, your deposits are insured up to $250,000 for each category of account held at that banking institution.

It is important to note that accounts owned in the name of a revocable trust can increase your FDIC insurance coverage, significantly in some cases. There are two distinct types of revocable trust accounts covered by FDIC deposit insurance regulations: informal revocable trusts (e.g. payable-on-death (POD), in-trust-for (ITF), as trustee for (ATF), or Totten trust accounts) and formal revocable trusts (e.g. a living or family trust document prepared by an estate planning attorney). Under either type of trust account, the owner has retained discretion to revoke, terminate, or amend the trust designation at any time.

A revocable trust account is insured by the FDIC for up to $250,000, per named beneficiary, if there are five or fewer beneficiaries. This means that if you have a revocable trust account with one named beneficiary, your deposits are insured up to $250,000. If you have a revocable trust account with five beneficiaries, your deposits are insured up to $1,250,000 ($250,000 per beneficiary).

When the number of trust beneficiaries exceeds five and the aggregate balance of the accounts exceeds $1,250,000, the calculation of coverage is more complicated. First the funds are allocated to the various beneficiaries in accordance with the terms of the trust agreement. Then, the standard maximum deposit insurance amount (the SMDIA) is applied separately to each beneficiary’s interest. To the extent that any beneficiary’s interest exceeds the SMDIA, the excess will be uninsured. At a minimum, accounts with more than five beneficiaries will be fully insured up to $1,250,000. This calculation will also be applied separately to each owner of the revocable trust account. For example, let’s say you and your spouse have a joint qualified spousal trust in place naming your three children as beneficiaries, and your bank account is set up as POD to the trust. This would mean that the maximum amount of insurance coverage available from the FDIC for the account is $750,000 for you and $750,000 for your spouse, for a combined total coverage of $1,500,000.

In order to take advantage of the additional coverage for trust accounts, you will need to ensure that your trust account is properly structured. Here are some tips:

• Make sure your account is properly titled. FDIC regulations require that the beneficiaries’ names be reflected in your bank’s account records for informal revocable trust accounts. For formal revocable trust accounts, the beneficiaries are identified in the trust agreement, so the bank does not need duplicate information in their records.
• Keep accurate records. Keep track of the names and addresses of all beneficiaries and co-owners of your revocable trust account.
• Work with a qualified professional. Consult with an attorney or financial advisor who is experienced in estate planning and FDIC insurance coverage to ensure that your revocable trust account is structured properly.

Revocable trusts are widely recognized as one of the most valuable tools available to an estate plan due to the probate avoidance, flexibility, and creditor protection benefits they can provide. The additional FDIC coverage afforded to trust accounts is just another reason to consider utilizing this technique as part of your own plan. If you’re considering establishing or updating a revocable trust account, be sure to work with a qualified professional to ensure this account meets your estate planning and financial goals and that it is properly structured to maximize available FDIC insurance coverage.

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Alexandra A. Henson is an estate planning attorney with the law firm of Carnahan Evans PC. She can be reached at ahenson@carnahanevans.com or 417-447-4400.