Almost every funded trust has one or more bank accounts—checking, savings, money market, or certificates of deposit—and most of those accounts are FDIC-insured. What many people don’t realize is that the regulations regarding the amount of trust accounts covered by FDIC insurance are calculated differently than those for individual account holders. Now, the FDIC has issued new regulations, effective April 1, 2024, on how insured amounts are calculated. These changes make it easier to calculate what is and is not insured but still requires some adjustment in how much is held in trusts.
Currently, FID treats revocable and irrevocable trusts differently. Revocable trusts, which include informal trust accounts such as pay-on-death (POD) or trustee-insured (ATF) accounts for a maximum of $250,000 per unique beneficiary with a maximum of five beneficiaries, provided that 1) the address of the bank account states: The account is for a trust, 2) each beneficiary is named in the correct place, and 3) each beneficiary is a living person, charity, or nonprofit organization. So, if a revocable trust has only one beneficiary, the insurance limit is $250,000, if the revocable trust has five or more beneficiaries, the insurance limit is $1,250,000 total.
Irrevocable trust accounts are usually only insured with a maximum of $250,000 in all deposits added together per beneficiary. To qualify, an irrevocable trust must 1) be a valid trust under state law, 2) the purpose of the trust is disclosed to the bank, and 3) the amount owed to the beneficiary cannot be conditional (i.e. the beneficiary survives to a certain date) . Because most irrevocable trusts have current and contingent beneficiaries, they fail to meet all four tests and are therefore limited to total insurance coverage of $250,000 at each FIC-insured bank.
The result is that most trust accounts, whether cancelable or non-cancellable, are limited to $250,000 per FDIC-insured bank.
The FDIC’s final regulations will, effective April 1, 2024, change how bank accounts are insured in the name of the trust. The change of rule treats both revocable trust and irrevocable trust in the same way as to define security limits. Soon, accounts held in trust may be insured by the FDIC for $1,250,000 insured, instead of the $250,000 cap for individual accounts.
Under the new rules, non-cancellable and non-cancellable trusts are treated the same way—money up to $250,000 per beneficiary per FDIC-insured bank is insured. Total insured is limited to five beneficiaries, or the equivalent of $1,250,000, but all donors are also covered up to $250,000. Here are some examples of how this works.
Bob creates a revocable trust, with himself as grantor, and stipulates that the trusts, on his death, go to his two children and, if they die before him, to go equally to his five grandchildren. Bob puts $750,000 into a bank account in the name of the Revocable Trust. The maximum insured amount is $500,000 ($250,000 x two children) but if his children died before Bob, the maximum insured is $1,250,000 ($250,000 x five grandchildren).
For mutual funds, each interest is insured from the donors, so if John and Jane set up a mutual fund with both of them as donors, and their three children are the beneficiaries, the amount insured is $1,500,000 ($250,000 x two donors x three beneficiaries).
So, between now and April 1, 2024, if you have accounts at an FDIC-insured bank in the name of a trust, you must review the amount held in each bank and the amounts that will be insured for each grantor and beneficiary.
Matthew Erskine is the Managing Partner at Erskine & Erskine.