Most people are aware that the Federal Deposit Insurance Corporation (“FDIC”) provides deposit insurance that guarantees the safety of accounts in certain member banks up to $250,000. However, most people are unaware that accounts held in the name of a revocable living trust can increase the amount of FDIC insurance coverage depending upon whether the trust is for a single person or a married couple and depending upon the number of trust beneficiaries.
From the FDIC Website:
Deposit insurance coverage for revocable trust accounts is provided to the owner of the trust. However, the amount of coverage is based on the number of beneficiaries named in the trust and, in some cases, the interests allocated to those beneficiaries, up to the insurance limit. A trust beneficiary can be an individual (regardless of the relationship to the owner), a charity, or a non-profit organization (as defined by the IRS).
Revocable trust coverage is based on all revocable trust deposits held by the same owner at the same bank, whether formal or informal. If a revocable trust account has more than one owner, each owner’s coverage is calculated separately, using the following rules:
• Revocable Trust Deposits with Five or Fewer Beneficiaries — Each owner’s share of revocable trust deposits is insured up to $250,000 for each unique eligible beneficiary named or identified in the revocable trust (i.e., $250,000 times the number of different beneficiaries), regardless of actual interest provided to beneficiaries.
• Revocable Trust Deposits with Six or More Beneficiaries — Each owner’s share of revocable trust deposits is insured for the greater of either (1) coverage based on each unique eligible beneficiary’s actual interest in the revocable trust deposits, with no beneficiary’s interest to be insured for more than $250,000, or (2) $1,250,000.
The deposit coverage rules can be confusing, even for seasoned attorneys. To help determine the amount of FDIC coverage in different situations, the FDIC website features a calculator known as the Electronic Deposit Insurance Estimator (“EDIE”). It is helpful to use the EDIE to run through various scenarios to better understand the coverage as it relates to revocable living trusts.
For example, according to the EDIE, if Gwen, a single person, has a revocable living trust and has only named one beneficiary of her trust, the total amount covered under FDIC is $250,000 for her trust account.
However, if Gwen has three individuals as beneficiaries of her trust, then EDIE calculates her total coverage for the one trust account to be $750,000 ($250,000 worth of coverage for each beneficiary of the trust).
Changing the facts a bit further, if Gwen gets married and establishes a married joint revocable living trust with her husband and names three individuals as beneficiaries of her trust, according to the EDIE, the total amount insured increases to $1,500,000 (Gwen gets $250,000 coverage for each of the trust’s three beneficiaries and her husband also gets $250,000 for each of the trust’s three beneficiaries).
Of course, with trusts and beneficiaries, it could be a bit of a moving target. For example, if Gwen and her husband establish a revocable living trust that names three individuals as beneficiaries, the coverage at that time is $1,500,000 as described above. However, if one of the three beneficiaries dies before Gwen and her husband and the terms of the trust provide that the trust will therefore be divided among the remaining two beneficiaries, then the coverage drops to $1,000,000 (both Gwen’s coverage and her husband’s coverage for the third beneficiary who is now deceased are eliminated).
The FDIC also provides expanded coverage for other types of accounts such as joint accounts, “payment on death” accounts, and retirement accounts. Fully understanding the extent and limits of your coverage is prudent. If you are unable to determine your coverage using the EDIE, the FDIC encourages you to contact them directly to run through different scenarios.
KRASA LAW, Inc. is located at 704-D Forest Avenue, Pacific Grove, California and Kyle may be reached at 831-920-0205.
Disclaimer: This article is for general information only. Reading this article does not establish an attorney/client relationship. Before acting on any of the information presented in this article, you should consult a competent attorney who is licensed to practice law in your community.