FDIC Insurance, Revocable Trusts, and Estates

Senate Majority Leader Harry Reid (D-NV)(C), is handed a note while he and Senate Banking Committee Chairman Christopher Dodd (D-CT)(R), speak to the media after the final vote on Wall Street reform, July 15, 2010 in Washington, DC.

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In the aftermath of the Great Recession, there was a lot of confusion about the amount of insurance protection offered to bank accounts held in FDIC-insured banks along with the confusing rules that apply to trust and estate accounts.

In response, on September 26, 2008, the FDIC Board of Directors issued an interim new rule that applies to coverage offered to "Revocable Trust Accounts." Along with this new rule came the long-awaited permanent increase in FDIC insurance coverage from $100,000 to $250,000 per depositor, per insured depository institution for each account ownership category that was included in the Wall Street Reform and Consumer Protection Act signed into law by former President Obama on July 21, 2010.

FDIC's Definition of "Revocable Trust Account"

The FDIC's definition of "Revocable Trust Account" includes informal trust accounts—including payable on death, or POD accounts; in-trust-for, or ITF accounts; and Totten Trust accounts—as well as formal accounts that are owned by the trustee of a traditional Revocable Living Trust.

Summary of the Old Rule Governing FDIC Insurance and Revocable Trust Accounts

The old rule governing Revocable Trust Accounts provided for the following:

  1. Accounts were insured up to $100,000 per “qualifying beneficiary” designated by the owner of the account.
  2. Qualifying beneficiaries were defined as the account owner’s spouse, children, grandchildren, parents, and siblings.
  3. Multiple account owners received coverage separately for each owner, per qualifying beneficiary.
  4. "Per-qualifying beneficiary" coverage was available on Revocable Trust Accounts separately from the coverage offered in connection with other accounts held in other ownership capacities (such as in individual or joint names) at the same FDIC-insured bank.
  5. An account was covered only if it met three requirements: (1) Title had to include the term POD, or ITF, or Revocable Trust, or a similar term indicating an intent that the account would pass to the trust beneficiaries after the owner's death; (2) Each beneficiary had to be a "qualifying beneficiary" as defined above; and, (3) For POD accounts, the beneficiaries had to be specifically listed in the account records, while the beneficiaries of a formal Revocable Living Trust didn't have to be listed.
  6. In determining coverage, it was necessary to understand each beneficiary’s beneficial interest in the Revocable Trust, be it a lump sum bequest, a life estate, or an equal or unequal share of the residuary trust.
  7. All funds that an owner held in both formal Revocable Living Trust accounts and POD accounts naming the same beneficiaries were aggregated for FDIC purposes and insured only to the maximum applicable coverage limits.

Summary of the New Rule Governing FDIC Insurance and Revocable Trust Accounts

The FDIC had several goals with regard to the promulgation of the new interim rule:

  1. To simplify the rule so that it would be easier for bank employees and consumers alike to understand and apply.
  2. To eliminate the requirement that a beneficiary is a "qualifying beneficiary."
  3. To eliminate the requirement to look at the actual beneficial interest of each beneficiary of the Revocable Trust for accounts valued at $500,000 or less.
  4. To set reasonable limits on coverage for trust accounts that have more than five different beneficiaries and hold more than $500,000.

As a result, the new interim rule retains all of the features of the old rule listed above with three important exceptions:

  1. Beneficiaries no longer need to be "qualifying beneficiaries." Instead, any beneficiary named in the Revocable Trust—as long as the beneficiary is a natural person, or a charity or other non-profit organization—is offered coverage.
  2. For accounts with total balances of $500,000 or less, coverage is determined without the need to ascertain each beneficiary’s beneficial interest in the Revocable Trust (including life estates, which are given $250,000 of coverage).
  3. Coverage is limited for Revocable Trusts that have more than five different beneficiaries and accounts holding more than $1,000,000.

How Much FDIC Insurance Coverage Do Estate Bank Accounts Receive?

If you are the personal representative of a probate estate, then it is your fiduciary duty to understand how the FDIC rules apply to estate assets that are held in FDIC-insured banks. While you would think that, just like a trust bank account, an estate bank account would be insured on a per-beneficiary basis, this is not the case.

Instead, estate bank accounts are only insured up to the current maximum amount of $250,000. So, if the estate is not going to be closed anytime soon and the cash in the bank exceeds $250,000, then you should consider spreading the cash among several different banks or using the CDARS program to fully protect the estate's money.

Using the FDIC's "EDIE the Estimator" to Determine Your Coverage

Even though the interim new rule does simplify the calculation of coverage for revocable trust accounts in many regards, figuring it all out can still be confusing. To help consumers determine their coverage, the FDIC website has a tool named "Edie the Estimator" that will calculate the coverage you'll receive on the individual, trust, and business accounts held in FDIC-insured institutions.