How to Maximize Federal Protection of Your Bank Accounts

Thanks to a recent FDIC rule, the owner of a living trust account can be insured for up to $100,000 per beneficiary

July 28, 2008 — The federal government's recent takeover of certain banks has caused much concern over whether other banks may have problems and the amount by which your bank deposits are protected by the Federal Deposit Insurance Corporation (FDIC). If you share those concerns, our first piece of advice is: Don’t panic. As long as you have less than $100,000 in one bank, all of your deposits should be fully insured by the FDIC.

That’s not to suggest, however, that you should ignore opportunities to increase your protection. Here are two steps you can take to ensure the security of the money you have on deposit.

First, use the FDIC's Electronic Deposit Insurance Estimator (EDIE) to determine the amount of insurance coverage on your accounts. If you need help with this (it can be a bit complicated), contact us for guidance.

Second, maximize your FDIC insurance coverage. A properly drafted and funded trust can get you much more insurance coverage than an account owned in your name.

A living or “family” trust is a formal revocable trust through which the owner – also known as a grantor, trustmaker or settlor – specifies who will receive the trust’s assets when the owner dies. The owner keeps control of the trust assets during his or her lifetime and can change the trust at any time.

Treatment of Trusts. Thanks to a recent FDIC rule, the owner of a living trust account is insured for up to $100,000 per beneficiary, provided all of the following requirements are met.

Requirement 1. The beneficiary must be the owner’s spouse, child, grandchild, parent or sibling. Stepparents and stepchildren, adopted children and similar relationships also qualify. (In-laws, cousins, nieces and nephews, friends, and charitable organizations do not qualify.)

Requirement 2. The beneficiary must become entitled to his or her interest in the trust when the owner dies. Coverage would be based on the beneficiaries who meet this requirement at the time the bank fails.

Example. A living trust names an owner’s three children as beneficiaries but states that, if the beneficiary dies before the owner, each beneficiary’s share will pass to the beneficiary’s children. In the event of a bank failure, if all three children are alive only the children — not the grandchildren — would be beneficiaries for insurance purposes (that’s because the grandchildren are not entitled to any trust assets while their parent is alive). Coverage up to $300,000 ($100,000 per beneficiary) would be available on the trust’s deposit accounts.

Requirement 3.The manner in which the account is titled at the bank must indicate that the account is held by a living trust. This rule can be met by using the terms “living trust” or “family trust” in the account title.

Coverage is based on the actual interests of each qualifying beneficiary. Unless the trust states otherwise, the FDIC will assume that the beneficiaries have an equal interest in the living trust account.

Example. A father has a living trust leaving all trust assets equally to his three children. This trust’s account would be insured up to $300,000 since there are three qualifying beneficiaries who would become owners of the trust assets when the owner dies.

New Rule vs. Old. Previously, many living trusts did not qualify for per-beneficiary coverage because they contained conditions that prevented a qualifying beneficiary from actually receiving his or her share of the trust assets when the owner died. Under the new rule, the FDIC will ignore these conditions for insurance purposes.

In addition, the former rule required banks to keep the names of the trust beneficiaries in the bank’s account records. Under the new rule, a bank needs only to indicate in the account title that the account is held by a living trust.

Note: The rule for “payable on death” (POD) accounts has not changed. The names of the beneficiaries of such an account still must be identified in the bank’s records.

Multi-Owner Trusts. If a living trust has more than one owner, coverage would be up to $100,000 per qualifying beneficiary, per owner, provided the beneficiary would be entitled to receive the trust assets when the last owner dies.

Example. A husband and wife are co-owners of a living trust. The trust states that upon the death of one spouse the funds will pass to the surviving spouse, and upon the death of the last owner the funds will pass to their three children equally. This trust’s deposit account would be insured up to $600,000.

Non-Qualifying Beneficiaries. The trust interest of a non-qualifying beneficiary is insured as the owner’s single ownership funds and would be added to any other single ownership funds the owner may have at the same bank. The total would be insured up to $100,000.

Let’s assume that a living trust states that the trust assets will belong equally to the owner’s husband and nephew upon her death. If the trust’s account has a balance of $200,000, the husband’s $100,000 share would be insured as her revocable trust funds, and the nephew’s $100,000 share would be insured as her single ownership funds. If the owner already had a single ownership account for $20,000, the nephew’s $100,000 interest would be added to the owner’s other single ownership funds, and the total would be insured for $100,000, leaving $20,000 uninsured.

Life Estate Interests. Living trusts often give a beneficiary the right to receive income from the trust or to use trust assets during the beneficiary’s lifetime (known as a “life estate” interest or, in trusts prepared by Hoopes & Adams, a “lifetime protective trust”).

When the beneficiary with the life estate interest dies, the remaining assets pass to other beneficiaries. Unless otherwise indicated in the trust, the FDIC will assume that a beneficiary with a life estate interest owns an equal share of the trust with the other beneficiaries.

Example. A husband creates a living trust giving his wife a life estate interest in the trust assets, with the remaining assets going to their two children equally upon his wife’s death. Deposits for this trust could be insured up to $300,000 ($100,000 for each qualifying beneficiary, i.e., the wife and two children).

Separately Insured Accounts. The $100,000-per-beneficiary insurance limit applies to all revocable trust accounts – POD and living trust – that an owner has at the same bank. For example, a father has a POD account naming his son and daughter as beneficiaries, and he has a living trust account naming the same beneficiaries. The funds in both accounts would be added together and the total insured up to $200,000 ($100,000 per qualifying beneficiary).

Personalized Assistance. If you have the types of accounts described above, or if you would like to set up a living trust to create additional FDIC coverage, please call your Hoopes & Adams attorney at 480-345-8845.