What Trustees and Executors Should Know About FDIC Coverage

Recent headlines about bank closures have prompted people to check their personal bank accounts to make sure the balances are under the $250,000 FDIC insurance limits. The Federal Deposit Insurance Corporation (FDIC) is an independent agency of the United States government that protects depositors of insured banks against the loss of their deposits if an insured bank fails.[1] Clients should similarly be concerned about their trust and estate accounts, which are also covered by the FDIC, up to certain amounts.

Estate Accounts: the FDIC caps its insurance of estate accounts at $250,000, no matter how many beneficiaries the estate has.[2]

Revocable Trust Accounts: the FDIC insures the owner of a revocable trust account up to $250,000 per trust beneficiary if: (i) the account title indicates that the account is for a trust; (ii) each trust beneficiary is entitled to their interest in the revocable trust assets upon the grantor’s death; and (iii) each trust beneficiary is a living individual, IRS-qualifying charity, or nonprofit organization. If the revocable trust has no more than five beneficiaries, the coverage amount is determined by multiplying the number of beneficiaries by $250,000.[3] If the revocable trust has more than five beneficiaries, the coverage can exceed $1,250,000, but the calculation is more complicated.[4]

Irrevocable Trust Accounts: the FDIC insures each irrevocable trust beneficiary’s non-contingent interest[5] in a trust up to $250,000, if: (i) the trust is valid under state law; (ii) the bank’s deposit account records disclose the existence of the trust relationship; (iii) each beneficiary and their interest in the trust is identifiable from the bank’s deposit account records or from the trustee’s records; and (iv) each beneficiary’s interest is a non-contingent interest. For FDIC coverage purposes, “non-contingent interest” means the beneficiary’s interest does not need to meet any conditions in order to receive their allocation on the death of the grantor(s).[6] If a trust’s grantor retains an interest in a trust, the amount of the grantor’s retained interest would be added to any “single accounts”[7] owned by the grantor at the same bank, which is subject to the $250,000 limit for that person.[8]

The FDIC rules for Revocable Trust accounts and Irrevocable Trust accounts is scheduled to change on April 1, 2024.[9] The expected changes will limit coverage to $250,000 per trust beneficiary, not to exceed five.

Under the current rules, it can be difficult to calculate the amount the FDIC insures for certain account types. For example, determining whether a beneficiary has a non-contingent interest in a particular trust is often not straightforward and may be a question best left to an experienced trusts and estates attorney.

[1] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/.

[2] https://www.fdic.gov/deposit/diguidebankers/documents/single-accounts.pdf.

[3] https://www.fdic.gov/deposit/diguidebankers/documents/revocable.pdf.

[4] Id.

[5] An example of a contingent interest is “trustees have discretion to allocate funds among the beneficiaries of the trust” or “a beneficiary will not receive funds until she graduates college.”

[6] Note, it is uncommon for an irrevocable trust to meet all four criteria because most beneficiaries have contingent interests in a trust, which is why deposit insurance for most irrevocable trusts is capped at $250,000 at each FDIC-insured bank. See https://www.fdic.gov/deposit/diguidebankers/documents/irrevocable-trust.pdf.

[7] A single account is a deposit account owned by one person and titled in that person’s name only, with no beneficiaries. For example, this could be a checking account that you own at a bank with no named beneficiary. https://edie.fdic.gov/fdic_info.html#07.

[8] https://www.fdic.gov/resources/deposit-insurance/diguidebankers/irrevocable-trust/index.html.

[9] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/.