Insurance for Your Trust Bank Account
With the recent failure of Silicon Valley Bank, thoughts have again turned to the safety of bank accounts. On March 10, California regulators closed the bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. This was the second largest bank failure in United States history and came in an amazingly quick fashion after a bank run and capital crisis. The FDIC is a government corporation created by the Banking Act that was signed into law in 1933 by President Franklin D. Roosevelt in order to restore confidence in the American banking system during the Great Depression. More than one-third of banks failed in the years prior to the creation of the FDIC. The FDIC insures deposits at member banks in the event the bank fails. The standard insurance amount is $250,000 per depositor, per insured bank, for each ownership category.
If you set up a trust with our firm, you know that we recommend listing ownership of your bank accounts in your trust. Under current law, different rules apply to revocable trusts and irrevocable trusts. These rules can get very confusing. Generally, the owner of a revocable trust account is insured for up to $250,000 for each primary beneficiary. This changes if there are more than five beneficiaries and more than $1,250,000 in deposits. At a minimum, accounts with more than five beneficiaries will be insured up to $1,250,000. Irrevocable Trust accounts are insured up to $250,000 for the non-contingent trust interest of each beneficiary. Contingent interests are insured up to $250,000 in the aggregate. This latter situation is often the result for irrevocable trusts.
In January of 2022, the FDIC issued new rules that do not go into effect until April 1, 2024. The new rules will apply the same standard to Revocable and Irrevocable Trusts. The new rules provide that FDIC insurance coverage is limited to $250,000 per institution, per beneficiary, up to a maximum of five beneficiaries. Therefore, if the trust has one owner and five beneficiaries, the coverage will be $1,250,000. If the the trust is a joint trust with two owners and five beneficiaries, the coverage limits would be $2,500,000 ($250,000 for each beneficiary for each owner).
The beneficiaries must either be identified with the bank or in the trust instrument. Beneficiaries must be living individuals and/or an IRS qualifying charity or non-profit.
If you use a credit union, FDIC insurance does not apply, but accounts are insured by the NCUSIF. Revocable trust accounts may qualify for insurance coverage of up to $250,000 per beneficiary named by the owner (if a member of the credit union) that is separate from the individual coverage available to the trust owner. For example, if a person with a revocable trust with deposits of $750,000 names a spouse and two children as beneficiaries, the entire $750,000 would have separate NCUSIF coverage ($250,000 per beneficiary). This coverage is separate from the coverage provided to the other types of accounts held by the trust’s owner at the same federally insured credit union.
Irrevocable trusts have separate coverage based on the beneficial interest. The interest of each beneficiary in an account established as an irrevocable trust has separate NCUSIF coverage of up to $250,000. In cases where a beneficiary has an interest in more than one trust arrangement created by the same owner, the interests of the beneficiary in all accounts established under such trusts are added together for insurance purposes and insured for a total of up to $250,000.
Potentially increased insurance benefits under the current and pending FDIC rule NCUSIF rule is another great reason to have your bank accounts titled in the name of your trust.
This post is for informational purposes only and not for the purpose of providing legal advice. You should contact an attorney to obtain advice with respect to any particular issue or problem. Nothing herein creates an attorney-client relationship between Hallock & Hallock and the reader.