Almost every funded trust has one or more bank accounts—checking, savings, money market, or certificates of deposit—and most of these accounts are FDIC insured. What many don’t realize is that the regulations for how much of trust accounts are covered by FDIC Insurance are calculated differently than those for individual account owners. The FDIC has now issued new regulations, effective April 1, 2024, on how insurance amounts are calculated. These changes make it easier to calculate what is and isn’t insured, but will still require some adjustment in how much is held in trusts.
Currently, the FID treats revocable and irrevocable trusts differently. Revocable trusts, which include informal trust accounts such as Pay on Death (POD) or As Trustee For (ATF) accounts, are insured up to $250,000 per individual beneficiary up to a maximum of five beneficiaries, provided 1) the title of the bank account states that 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 non-profit organization. So, if a revocable trust account 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 in total.
Irrevocable trust accounts are generally only insured up to $250,000 for all deposits added together for each beneficiary. To qualify, an irrevocable trust must be 1) a valid trust under state law, 2) the purpose of the trust has been disclosed to the bank, and 3) the amount owed to the beneficiary cannot be contingent (ie, the beneficiary survives until a certain date). Because most irrevocable trusts have both current and contingent beneficiaries, they fail to meet all four tests and so are limited to $250,000 of total insurance coverage at each FIC-insured bank.
The result is that most trust accounts, whether revocable or irrevocable, are limited to $250,000 per FDIC-insured bank.
The FDIC’s final regulations, effective April 1, 2024, will change how bank accounts held in the name of a trust will be insured. This rule change treats both revocable and irrevocable trusts the same for determining insurance limits. Accounts owned by a trust may soon be FDIC insured for $1,250,000 insured, instead of the $250,000 limit for individual accounts.
Under the new rules, irrevocable and irrevocable trusts are treated the same – the funds are insured up to $250,000 per beneficiary at an FDIC-insured bank. The total sum insured is limited to five beneficiaries, or $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 the grantor, and provides that upon his death the trust funds go to his two children and, if they predecease him, to go equally to his five grandchildren. Bob places $750,000 in a bank account in the name of the revocable trust. The maximum sum insured is $500,000 ($250,000 x two children), but if his children predeceased Bob, then the maximum sum insured is $1,250,000 ($250,000 x five grandchildren).
For joint trusts, the interest of each of the trustees is insured, so if John and Jane set up a joint trust with both of them as trustees and their three children as beneficiaries, the sum insured is $1,500,000 ($250,000 x two grantors 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 should review how much is held at each bank and what amounts will be insured for each grantor and beneficiary.
Matthew Erskine is managing partner at Erskine & Erskine.