FDIC Insurance, Revocable Trusts and Estates: Are Your Accounts Protected?

New Interim Rule Simplifies Calculations for Trusts

With the recent rash of bank failures, there's been alot of confusion about the amount of insurance protection offered to bank accounts held in FDIC-insured banks. Coupled with this is the confusing rules that apply to trust and estate accounts. In response, on September 26, 2008, the FDIC Board of Directors issued an interim new rule that applies to coverage offered to "Revocable Trust Accounts." Coupled with this new rule is the temporary increase in coverage from $100,000 to $250,000 per depositor and per beneficiary of a trust that was included in the $700 billion economic bailout package signed into law on October 3, 2008. And add to that the May 2009 enactment of the Helping Families Save Their Homes Act which extends the $250,000 per depositor coverage through December 31, 2013.

FDIC's Definition of "Revocable Trust Account"

The FDIC's definition of "Revocable Trust Account" includes informal trust accounts, including payable on death, or POD accounts, in-trust-for, or ITF, accounts, and Totten Trust accounts, as well as formal accounts that are owned by the Trustee of a traditional Revocable Living Trust.

Summary of the Old Rule

The old rule governing Revocable Trust Accounts provided for the following:

1. Accounts were insured up to $100,000 per “qualifying beneficiary” designated by the owner of the account;
   
   
2. Qualifying beneficiaries were defined as the account owner’s spouse, children, grandchildren, parents and siblings;
   
   
3. Multiple account owners received coverage separately for each owner, per qualifying beneficiary;
   
   
4. "Per-qualifying beneficiary" coverage was available on Revocable Trust Accounts separately from coverage offered in connection with other accounts held in other ownership capacities (such as in individual or joint names) at the same FDIC-insured bank;
   
   
5. An account was covered only if met it three requirements: (1) Title had to include the term POD, or ITF, or Revocable Trust, or a similar term indicating an intent that the account would pass to the trust beneficiaries after the owner's death; (2) Each beneficiary had to be a "qualifying beneficiary" as defined above; and, (3) For POD accounts, the beneficiaries had to be specifically listed in the account records, while the beneficiaries of a formal Revocable Living Trust didn't have to be listed;
   
   
6. In determining coverage, it was necessary to understand each beneficiary’s beneficial interest in the Revocable Trust, be it a lump sum bequest, a life estate, or an equal or unequal share of the residuary trust; and
   
   
7. All funds that a owner held in both formal Revocable Living Trust accounts and POD accounts naming the same beneficiaries were aggregated for FDIC purposes and insured only to the maximum applicable coverage limits.

Summary of the New Rule

The FDIC had several goals with regard to the promulgation of the new interim rule:

1. To simplify the rule so that it would be easier for bank employees and consumers alike to understand and apply;
   
   
2. To eliminate the requirement that a beneficiary be a "qualifying beneficiary";
   
   
3. To eliminate the requirement to look at the actual beneficial interest of each beneficiary of the Revocable Trust for accounts valued at $500,000 or less; and
   
   
4. To set reasonable limits on coverage for trust accounts that have more than five different beneficiaries and hold more than $500,000.

As a result, the new interim rule retains all of the features of the old rule listed above with three important exceptions:

1. Beneficiaries no longer need to be "qualifying beneficiaries." Instead, any beneficiary named in the Revocable Trust, as long as the beneficiary is a natural person, or a charity or other non-profit organization, is offered coverage;
   
   
2. For accounts with total balances of $500,000 or less, coverage is determined without the need to ascertain each beneficiary’s beneficial interest in the Revocable Trust (including life estates which are given $250,000 of coverage); and
   
   
3. Coverage is limited for Revocable Trusts that have more than five different beneficiaries and accounts holding more than $1,000,000.

What About Estate Bank Accounts?

If you're the Personal Representative of a probate estate, then it's your fiduciary duty to understand how the FDIC rules apply to estate assets that are held in FDIC-insured banks. While you would think that, just like a trust bank account, an estate bank account would be insured on a per beneficiary basis, this isn't the case. Instead, estate bank accounts are only insured up the the current maximum of $250,000. So if the estate isn't going to be closed any time soon and the cash in the bank exceeds $250,000, then you should consider spreading the cash among several different banks or using the CDARS program to fully protect the estate's money.

Using the FDIC's "Edie the Estimator" to Determine Your Coverage

Even though the interim new rule does simplify the calculation of coverage for Revocable Trust Accounts in many regards, figuring it all out can still be confusing. To help consumers determine their coverage, the FDIC website has a tool named "Edie the Estimator" that will calculate the coverage you'll receive on individual, trust, and business accounts held in FDIC-insured institutions.