The FDIC and Your Trust: Are You Fully Insured?

trust

The recent collapse of Silicon Valley Bank has many asking, “Are my trust’s assets held in a bank protected by the Federal Deposit Insurance Corporation, and, if so, to what extent?” The answer depends on several factors, such as the type of trust you have, whether the interests of your trust’s beneficiaries have vested, and how many beneficiaries your trust designates. In addition to learning how the current rules regarding FDIC insurance impact your trust, it is also important to understand key changes in FDIC regulations that will become effective on April 1, 2024.

In 1933 the Federal Deposit Insurance Corporation (FDIC) was established as the entity responsible for insuring the deposits of bank account holders in the United States. As a result of the 2010 Dodd-Frank Act, depositors in the United States are insured by the FDIC up to a limit of $250,000 per institution, meaning that any depositor of a FDIC member bank (virtually all US banks are FDIC insured members) will be made whole up to $250,000 by the government in the case of a total bank failure. If your cash savings exceed $250,000 you can protect yourself by opening accounts at multiple banks, as the federal insurance limit applies anew at each different bank where you have an account. However, trust instruments and their holdings are more complicated than that of an individual bank account holder. Therefore, it is critical to understand how bank assets in your trust’s name are affected and protected by FDIC insurance.

For the following discussion, please recall that the “grantor” of a trust is the person who creates and funds the trust, and the “beneficiary” is that person/persons whom the grantor has named to benefit from the trust after the grantor’s death.

Revocable Living Trusts (RLT)

Revocable living trusts are the most common trust instrument established by our clients. RLTs offer you the flexibility to amend the trust’s terms or revoke the trust entirely during your lifetime. While FDIC insurance for individuals will cover only up to $250,000 per depositor, assets held in the name of your trust are granted an additional $250,000 of coverage for each unique beneficiary of the trust, which includes individuals and charitable organizations. This FDIC coverage only protects the trust account deposits of beneficiaries whose interest in the trust’s assets has vested (i.e., when the bank fails, the beneficiary is entitled to her share of the trust’s assets at the time when the grantor dies).

So long as all beneficiaries of a trust have an equal interest in the trust’s assets, federal deposit insurance will cover up to $250,000 for each beneficiary whose interest has vested, regardless of the number of beneficiaries. However, if your trust (1) designates more than five beneficiaries, and (2) distributes the assets of the trust unequally, federal deposit insurance will cover either the sum of each beneficiary’s actual interest up to $250,000 each, or a total coverage amount of $1,250,000 – whichever amount is greater.

Consider also that when a trust has more than one grantor (i.e., a joint trust between a husband and wife), each beneficiary of the trust is then covered twice, once by each grantor’s FDIC limit. For example, if a married couple established a joint trust for the benefit of their daughter, and that trust holds assets of $1,000,000 dollars in a bank account, the portion of that trust which would be FDIC insured if the bank were to fail is $500,000 ($250,000 for the portion of the property granted by the husband to the daughter, and $250,000 for the portion granted by the wife to the daughter). However, if the co-owners are the only beneficiaries of the trust, the account is instead insured up to $250,000.

Irrevocable Living Trusts (ILT)

Upon the death of the grantor of a revocable living trust, the trust becomes legally irrevocable, or unchangeable. However, for the purposes of federal deposit insurance, those trusts which were established as RLTs may continue to be treated as such after the death of the grantor for federal deposit insurance purposes.

In some less common instances, our clients establish irrevocable living trusts while they are still alive. These trusts are insured a bit differently.

First, with respect to grantors of ILTs, any retained interest in the trust which the grantor holds is insured up to $250,000, aggregated with any other assets the grantor may hold in that bank. For example, if a grantor is the lifetime beneficiary of a trust that holds $1,000,000 and the grantor also has a checking account worth $100,000 in his own name at the same bank, the total amount of his assets will be considered $1,100,000 for FDIC insurance coverage of only $250,000 – despite the fact the money was divided between a personal and trust account. There is no FDIC double dipping simply because the money is nominally divided between the grantor’s personal and trust accounts. Second, beneficiaries of ILTs can enjoy up to $250,000 of insurance coverage for any interest that is a non-contingent, vested interest (a contingent interest, for example, is a condition which must be satisfied for a beneficiary to receive his trust share: i.e., Johnny’s interest in the trust will vest when he graduates college with a 4.0 grade point average). However, as is more commonly the case with ILTs, a contingent interest means that only the trust’s account, and not the individual interests of the beneficiaries, will be eligible for coverage up to $250,000. This circumstance means that most ILTs will be eligible for only $250,000 of federal deposit insurance at any given institution.

2024 and Beyond

Key changes to federal deposit insurance regulations will take effect on April 1, 2024. Under the new rules, RLTs will only be insured for a maximum of five separate beneficiary interests up to $250,000 each (for a total of $1,250,000) regardless of whether the beneficiaries hold equal interests in the trust. Recall that, under the current rules, an unlimited number of beneficiaries’ trust assets can be insured up to $250,000 so long as all beneficiaries hold an equal interest in a RLT. This change means that for those trusts which designate more than five beneficiaries, spreading the accounts across more than one FDIC- insured institution ensures the most federal deposit insurance coverage.

However, if the co-owners are the only beneficiaries of the trust, the account is instead insured under the FDIC’s current rule of insurance up to $250,000.

Any news of bank failure and financial turmoil is certainly troubling. However, you can be confident that your money is protected by FDIC insurance, especially if you diversify the number of banks at which you deposit your money. Titling your accounts in a living trust with multiple beneficiaries offers far greater insurance coverage for your deposits than an individual account can. If you have any questions about your current trust or are interested in learning more about establishing a trust, please contact your JGB attorney.

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