FDIC Insurance Basics

The Federal Deposit Insurance Corporation (FDIC) protects deposits in insured banks up to $250,000 per depositor, per insured bank, per ownership category.  Trust accounts fall under a special ownership category, which means they have unique coverage rules.

Types of Trust Accounts

• Revocable Trusts: These include living trusts and informal arrangements such as Payable on Death (POD), In Trust For (ITF), or Totten trusts.  The owner retains control during their lifetime.
• Irrevocable Trusts: Created by written agreement or statute, these trusts cannot be changed or revoked by the owner.

New FDIC Rules (Effective 1 April 2024)

To clarify recent changes, the FDIC merged revocable and irrevocable trust accounts into a single category, ‘Trust Accounts, ‘effective 1 April 2024, affecting how coverage is calculated and applied.

Here’s what changed:

• Coverage per Beneficiary: $250,000 for each unique, eligible Beneficiary.
• Maximum Coverage: Up to five beneficiaries per owner, capped at $1.25 million per owner, per bank.
• Applies regardless of contingencies or whether the trust is revocable or irrevocable.
• If a trust has more than five beneficiaries, coverage does not increase beyond $1.25 million.

https://www.fdic.gov/resources/deposit-insurance/understanding-deposit-insurance

Formula:

Coverage = Number of Owners × min (Number of Beneficiaries, 5) × $250,000

Practical Examples

• One owner, three beneficiaries → $750,000 coverage.
• One owner, six beneficiaries → $1.25 million coverage (due to cap).
• Two owners, five beneficiaries → $2.5 million coverage.

Important Considerations

• Coverage applies only to deposits in FDIC-insured banks.
• If your trust accounts exceed these limits, you may need to spread funds across multiple banks.
• Complex trusts with contingent beneficiaries now follow the same simplified rule.

What If Your Trust Account Exceeds FDIC Limits?

If deposits in a trust account exceed the insured limits, the excess amount is not protected by FDIC insurance.

Here’s what happens:

Uninsured Funds Are at Risk: If the bank fails, any amount above the insured limit becomes part of the bank’s receivership process.  Recovery of these funds depends on asset liquidation and may be partial.

• Strategies to Protect Excess Funds:
• Distribute funds across multiple FDIC-insured banks.
• Use different ownership categories (individual, joint, trust) for separate coverage.
• Consider programs like CDARS or ICS that spread large deposits among multiple banks while maintaining FDIC coverage.

The FDIC does not provide automatic coverage beyond the limits, even if you have many beneficiaries.  The maximum per-owner-per-bank for trust accounts remains $1.25 million under the new rules.

Bottom Line

The FDIC insures trust accounts, but under the new rules, coverage is capped at $1.25 million per owner per bank for up to five beneficiaries.  Review your trust structure and banking relationships to ensure complete protection.