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Maximum Insurance Coverage for Trust Owners under the FDIC

March 16, 2023

On Friday, March 10, 2023, the Silicon Valley Bank (“SVB”) of Santa Clara, California was shut down by California regulators, who next appointed the Federal Deposit Insurance Corporation (the “FDIC”) as receiver to guarantee customer deposits. SVB’s collapse continues to reverberate across the financial markets, leaving investors, customers, and funders wary of what’s to come.

This article focuses on how the FDIC may determine insurance coverage for trust accounts amidst the murky waters of the ripple of SVB’s failure.

Please note that this article is not intended as a legal interpretation of the FDIC’s laws and regulations. The information in this article is based on FDIC laws and regulations in effect at publication. These rules can be amended and, therefore, some of the information in this article may become outdated. For additional or more specific information about FDIC insurance coverage, consult the Federal Deposit Insurance Act (12 U.S.C.1811 et seq.) and the FDIC’s regulations relating to insurance coverage described in 12 C.F.R. Part 330.

FDIC Coverage Overview

The standard deposit insurance amount is $250,000 per depositor, per insured bank, for each account ownership category. The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately chartered insured bank. For example, if a person has a certificate of deposit at Bank X and has a certificate of deposit at Bank Y, the amounts would each be insured separately up to $250,000. Funds deposited in separate branches of the same insured bank are not separately insured.

Maximum Insurance Coverage for Trust Accounts

Revocable Trust Accounts

In general, the owner of a revocable trust account is insured up to $250,000 for each unique beneficiary, if all of the following requirements are met:

  1. The account title at the bank must indicate that the account is held pursuant to a trust relationship, which can be satisfied by using the terms payable on death, in trust for, as trustee for, living trust, family trust, or any similar language, including simply having the word “trust” in the account title. The account title includes information contained in the bank’s electronic deposit account records.
  2. The beneficiaries must be named in either the deposit account records of the bank (for informal revocable trusts) or identified in the formal revocable trust document. For a formal trust agreement, it is acceptable for the trust to use language such as “my issue” or other commonly used legal terms to describe the designated beneficiaries, provided the specific names and number of eligible beneficiaries can be determined.
  3. To qualify as an eligible beneficiary, the beneficiary must be a living person, a charity or a non-profit organization. If a charity or non-profit organization is named as beneficiary, it must qualify as such under Internal Revenue Service regulations.

An account must meet all of the above requirements to be insured under the revocable trust ownership category. Typically, if any of the above requirements are not met, the entire amount in the account, or the portion of the account that does not qualify, is added to the owner’s other single accounts, if any, at the same bank and insured up to $250,000. If the trust has multiple co-owners, each owner’s share of the non-qualifying amount would be treated as his or her single ownership account.

Insurance coverage for revocable trust accounts is calculated differently depending on the number of beneficiaries named by the owner, the beneficiaries’ interests and the amount of the deposit. Specifically, the calculation method varies depending on whether a revocable trust owner has five or fewer unique beneficiaries or six or more unique beneficiaries.

If a trust has more than one owner, each owner’s insurance coverage is calculated separately.

Five or Fewer Unique Beneficiaries in a Revocable Trust Account.

When a revocable trust owner names five or fewer beneficiaries, the owner’s trust deposits are insured up to $250,000 for each unique beneficiary.

This rule applies to the combined interests of all beneficiaries the owner has named in all formal and informal revocable trust accounts at the same bank. When there are five or fewer beneficiaries, maximum deposit insurance coverage for each trust owner is determined by multiplying $250,000 times the number of unique beneficiaries, regardless of the dollar amount or percentage allotted to each unique beneficiary. Therefore, a revocable trust with five unique beneficiaries is insured up to $1,250,000, as follows:

Number of Unique Beneficiaries Maximum Deposit Insurance Coverage
1 Beneficiary $250,000
2 Beneficiaries $500,000
3 Beneficiaries $750,000
4 Beneficiaries $1,000,000
5 Beneficiaries $1,250,000

Six or More Unique Beneficiaries in a Revocable Trust Account.

When a revocable trust owner names six or more beneficiaries and the beneficiaries do not have equal beneficial interests (i.e., they receive different amounts), the owner’s revocable trust deposits are insured for the greater of either: (1) the sum of each beneficiary’s actual interest in the revocable trust deposits up to $250,000 for each unique beneficiary, or (2) a minimum coverage amount of $1,250,000.

Number of Unique Beneficiaries Maximum Deposit Insurance Coverage
6 Beneficiaries with Equal Interests $1,500,000
7 Beneficiaries with Equal Interests $1,750,000
8 Beneficiaries with Equal Interests $2,000,000
9 Beneficiaries with Equal Interests $2,250,000
10+ Beneficiaries with Equal Interests Add up to $250,000 for each additional unique beneficiary

An owner who identifies a beneficiary as having a life estate interest in a formal revocable trust is entitled to insurance coverage up to $250,000 for that beneficiary. A life estate beneficiary is a beneficiary who has the right to receive income from the trust or to use trust deposits during the beneficiary’s lifetime, where other beneficiaries receive the remaining trust deposits after the life estate beneficiary dies.

EXAMPLE:  A husband is the sole owner of a living trust that gives his wife a life estate interest in the trust deposits, with the remainder going to their two children upon his wife’s death. Maximum insurance coverage for this account is calculated as follows: $250,000 times three different beneficiaries equals $750,000.

Irrevocable Trust Accounts

Since irrevocable trusts usually contain conditions that affect the interests of the beneficiaries or provide a trustee or a beneficiary with the authority to invade the principal, insurance coverage for an irrevocable trust account usually is limited to $250,000.

The interests of a beneficiary in all deposit accounts under an irrevocable trust established by the same settlor and held at the same insured bank are added together and insured up to $250,000, only if all of the following requirements are met:

  1. The trust must be valid under state law;
  2. The insured bank’s deposit account records must disclose the existence of the trust relationship;
  3. The beneficiaries and their interests in the trust must be identifiable from the bank’s deposit account records or from the trustee’s records; and
  4. The amount of each beneficiary’s interest must not be contingent as defined by FDIC regulations.

If the owner retains an interest in the trust, then the amount of the owner’s retained interest would be added to the owner’s other single accounts, if any, at the same insured bank and the total insured up to $250,000.

EXAMPLE:  If the grantor of an irrevocable trust is still living, and the trust provides that trust assets can either be used by the grantor or by a trustee on behalf of the grantor, the grantor would be deemed to have a retained interest. Thus, this irrevocable trust account would not be insured under the irrevocable trust ownership category, but as a single ownership deposit of the grantor. The balance of the account would be added together with any other single ownership accounts the grantor has at the same bank, and the total would be insured up to $250,000.

Notably, a revocable trust account that becomes an irrevocable trust account due to the death of the trust owner may continue to be insured under the rules for revocable trusts. Therefore, in such cases, the rules in the revocable trust section, above, may be used to determine coverage.

Maximum Insurance Coverage for Persons Who Qualify for Multiple Ownership Categories

The FDIC provides separate insurance coverage for funds depositors may have in different categories of legal ownership. The FDIC refers to these different categories as “ownership categories.”

Types of Ownership Categories

  • Single Accounts
  • Certain Retirement Accounts
  • Joint Accounts
  • Revocable Trust Accounts
  • Irrevocable Trust Accounts
  • Employee Benefit Plan Accounts
  • Corporation/Partnership/Unincorporated Association Accounts
  • Government Accounts

Accordingly, a bank customer who has multiple accounts may qualify for more than $250,000 in insurance coverage if the customer’s funds are deposited in different ownership categories and the requirements for each ownership category are met.

Contact Us

Determining which ownership categories you belong to, as well as the extent to which such category qualifies for insurance coverage under the FDIC, can be complex. For assistance on such a determination, please contact us at info@rppmh.com.

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