The Federal Deposit Insurance Corporation (FDIC) insures bank accounts at participating banks in the event of bank failure. Currently, the FDIC insures up to $250,000 per depositor, per financial institution. But what if you have a bank account that is titled in the name of your revocable living trust? Is the account still insured? The answer is a reassuring “yes”– but with some important caveats that you should understand.
FDIC Insurance For Revocable Living Trusts
The FDIC covers up to $250,000 per depositor, per financial institution. However, the math gets tricky in the case of revocable living trusts. For revocable trusts, FDIC will insure up to $250,000 per beneficiary on a proportionate basis. The implications of this rule are best understood with the following examples:
Example 1: John Doe has $1,250,000 in his account at his bank, titled in the name of the John Doe living trust. The John Doe trust has 5 beneficiaries. The trust provides for each of the 5 beneficiaries to get an equal share. Therefore, each beneficiary will receive $250,000 ($1,250,000 divided by 5) upon the death of John Doe. Because each beneficiary’s share does not exceed $250,000, each beneficiary’s share, and the entire account, are fully FDIC insured.
Example 2: John Doe has an account of $1,250,000 at his bank, titled in the name of the John Doe Living Trust. Under this trust, the beneficiaries do NOT get equal shares. Beneficiary 1 is slated to get half of the trust money, or $625,000. The others, Beneficiaries 2, 3, 4 and 5, are entitled to equal shares of the remainder, or $156,250 each ($625,000 divided four ways). The shares of Beneficiaries 2, 3, 4 and 5 are fully protected because each share is under $250,000. Not so Beneficiary 1’s share: His share, $625,000 exceeds the maximum FDIC coverage of $250,000. That leaves $375,000 of Beneficiary 1’s share ($625,000 minus $250,000) unprotected. Thus, the entire account, $1,250,000, is insured only up to $875,000 ($1,250,000 minus $375,000).
Two Important Notes:
If the trust is a joint trust – for example, the John and Mary Doe Living Trust – FDIC insurance coverage is doubled per beneficiary. (Remember, coverage is per depositor, per bank, and in the case of a joint trust, there are actually two depositors). When either Mary or John Doe pass away, coverage will decrease by half.
Payable on Death accounts are subject to the same rules as accounts titled in the name of a revocable living trust.
Steps To Take If Your Account is Not Fully Insured
What are your options if you find that your bank account titled in the name of your revocable living trust has only partial FDIC coverage? The solution is to transfer some of the funds to another, FDIC insured financial institution. But be careful: The FDIC insurance applies on a per institution basis. That means you must transfers funds to an entirely different bank – not just a different branch of the same bank.
To learn more about FDIC coverage of trusts and other types of accounts, visit the FDIC website.