FDIC Insurance Limits for Living Trust Owned Bank Accounts

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FDIC Insurance Finance Living Trusts

During the early summer of 2008, largely as a result of predatory lending practices and reckless borrowing by homeowners, the US Banking system is under significant pressure. The U.S. Senate Banking Committee has identified 90 banks, S&L's or Thrifts as having marginal reserves to stay in business. One of the biggest U.S. Thrifts, IndyMac Bank, has recently failed and has been seized by Regulators. IndyMac depositors are understandably anxious and many have made a run on the bank to get their deposits out, which was the final straw in the Thrifts collapse. The good news for depositors is that their accounts are insured up to a point. In general, an individual or couple is insured for up to $100,000 for all of their accounts, perhaps more depending on how you hold title to multiple accounts at one institution. But what about accounts owned in the name of a Revocable Living Trust?

FDIC Rules

The Federal Deposit Insurance Corporation has it's own rules that pertain to insurance coverage's for various types of accounts. Their rules for Trusts can sometimes be confusing. We cannot give you any absolute advice on how much insurance is available under FDIC rules. In addition, the FDIC does not generally review individual trusts and tell you how much insurance would be available. What we can do is include here the general rules put out by the FDIC, and give you some questions to pose to your bank for an idea from them on how much insurance is provided. If you cannot get clarification to your satisfaction, you can be absolutely assured of complete protection if you keep no more than $100,000 in the name of your trust in any one bank.

The following information was obtained from the Federal Deposit Insurance Corporation (FDIC) as it relates to Bank and Savings & Loan deposits and how they are insured upon retitling into the name of a trust.

12 C.F.R. § 330.10(a). This regulation applies to revocable trust accounts held by all insured depository institutions, both banks and savings and loan associations (hereafter “savings associations”).

It is important to note that the special insurance coverage provided by the regulation quoted above depends, first of all, upon the proper titling of the trust accounts, and then, upon the listing of the trust's beneficiaries by name in the deposit account records of the insured depository institution.

As far as account titling is concerned, the terms which must be used are said to be “commonly accepted terms such as, but not limited to, ‘in trust for,' ‘as trustee for,' ‘payable-on-death to,' or any acronym [abbreviation] therefore.” 12 C.F.R. § 330.10(b) (emphasis added). Thus, if the title of a trust account suggests that a trust is involved, that title will usually be acceptable. For instance, a trust account entitled the “Jones Family Trust” or the “Jones Family Revocable Trust” would meet the proper titling.

The next requirement is that the trust's beneficiaries be “specifically” listed in the insured depository institution's “deposit account records.” The “specifically” means that the beneficiaries must be listed by name — for example, Ann Jones, Tommy Jones — not merely by the class to which they belong — that is, the requirement is not met by listing the beneficiaries merely as “my children.” As for the “deposit account records,” these are defined as “account ledgers, signature cards, certificates of deposit, passbooks … and other books and records of the insured depository institution, including records maintained by computer, which relate to the insured depository institution's deposit taking function….” 12 C.F.R. 330.1(e). For most purposes, perhaps the signature card and the certificate of deposit are the best places for listing one's beneficiaries.

In order to qualify for the special insurance coverage provided to revocable trust accounts by 12 C.F.R. 330.10, the following two conditions must be met upon the death of the last Settlor to die:

  1. There must be one or more qualifying beneficiaries to benefit from the trust (that is, one or more of the beneficiaries upon the death of the last Settlor must be the spouse, child, grandchild, parent or sibling of a Settlor); and
  2. A qualifying beneficiary, at the death of the last Settlor, must have a vested or non-contingent interest in the trust (such that the funds might be said to “belong” to the beneficiary). This “vested or non-contingent interest” for revocable trusts is defined far differently from the “vested or non-contingent interest” for irrevocable trusts and should not be confused with the irrevocable trust's definition.

The first condition — that, upon the death of the last Settlor, there must be one or more qualifying beneficiaries of a Settlor to benefit from the trust — is not very difficult to satisfy. The separate insurance coverage of revocable trust accounts is dependent upon a showing by the Settlor that at his or her death, the funds in the account “shall belong” to the Settlor's spouse, child, grandchild, parent, brother or sister. (“Child” includes a biological child, adopted child, and stepchild of the owner. “Grandchild” includes a biological child, adopted child, and stepchild of any of the owner's children. “Parent” includes a biological parent, adoptive parent, and stepparent of the owner. “Brother” includes a full brother, half brother, brother through adoption, and stepbrother of the owner. “Sister” includes a full sister, half sister, sister through adoption, and stepsister of the owner.)

The second condition, however — that a qualifying beneficiary must have a vested or non-contingent interest in the trust — is much more difficult to satisfy. The FDIC defines a “vested interest” in the context of a revocable trust as:

  1. An interest to which no defeating contingency is attached; AND
  2. An interest where the person holding it has already been born, and his/her identity ascertained upon the death of the last Settlor to die (or upon the earlier default of the insured depository institution); AND
  3. An interest where, no later than upon the death of the last Settlor to die, the trustee is instructed to set aside a share of the trust principal for this particular beneficiary (even if that share might later change in size, for example, when another grandchild of the Settlor is born after the death of the last Settlor, but before the funds are scheduled to be finally distributed; note, however, that this grandchild, because he/she was born after the death of the last Settlor, would not be considered a qualifying beneficiary because of requirement (2)); AND
  4. An interest where the beneficiary either receives an outright distribution of his/her share of the trust principal upon the death of the last Settlor OR can invade the principal of his/her share to an unlimited extent at his or her demand from that time on OR where the beneficiary will eventually take his/her share outright, provided that he/she survives for a given number of years or to a certain age, or, if he/she does not so survive, provided that his/her share in the trust will pass to his/her estate or his/her heirs at his/her death.

Assuming that a given trust fulfills all of the above requirements, the following example shows how an account holding the funds of that trust would be insured.

The Basic Operation of the Rule

Suppose that two Settlors, a husband and wife, establish a revocable trust for the benefit of the survivor of either one of them and their four children. Upon the death of the first Settlor, the trust is split into a marital trust for the surviving spouse and a family trust for the children. The trust defines how much is to go into each of these sub-trusts and provides that the surviving spouse will be able to invade the principal of his/her trust to an unlimited extent during his/her life, and, if he/she wishes, to dispose of the rest (if any) of the marital trust by will. The trust also provides that, upon the death of the last Settlor, the trustee is to set aside a share of the family trust for each of the Settlors' children then living. Each child is to receive his/her share outright when he/she attains 21 years of age. If a child dies before reaching 21 years of age, his/her share of the trust will go to his/her estate or heirs.

What would be the insurance coverage of such a trust? It is important to remember that the amount of insurance coverage can change according to who is alive when the bank or savings association fails and according to whether the trust then in operation is a revocable or irrevocable trust.

While both the husband and wife are alive, the trust outlined above is revocable, so one would apply the insurance regulation at 12 C.F.R. § 330.10. Looking to the number of qualifying beneficiaries (here, children) who will have a vested interest upon the death of the last Settlor to die, one finds the four children. Thus, if the depository institution should fail while both spouses are alive, the trust would be insured for a maximum amount equal to –The number of Settlors then living (2) times the number of qualifying beneficiaries then living (4) times $100,000 = $800,000.

Upon the death of the first spouse, the trust remains revocable (because the surviving spouse still has the power to revoke it), and the rules for revocable trusts continue to apply. Once again, the qualifying beneficiaries who will have a vested interest in the trust upon the death of the last Settlor are the four children. Thus, if the depository institution should fail when the surviving spouse is alive, the trust would be insured for a maximum amount equal to the number of Settlors then living (1) times the number of qualifying beneficiaries then living (4) times $100,000 = $400,000.

Upon the death of the surviving spouse — that is, upon the death of the last Settlor — the trust usually becomes irrevocable (because usually only the Settlors have the power to revoke the trust and once they have died that power is gone). Because the trust is irrevocable, one must apply the regulation for irrevocable trusts. According to that regulation, in order for a beneficiary's interest to receive separate insurance coverage, the beneficiary need not be only the spouse, child, grandchild, parent or sibling of the Settlor. Instead, the rule for irrevocable trusts adds together all of the “non-contingent trust interests” of the same beneficiary that are created by the same Settlor (in one or more irrevocable trusts) and insures that beneficiary's total interest which is derived from that Settlor for up to $100,000, with such coverage remaining separate from that provided for other accounts maintained by the Settlors, trustees or beneficiaries of the irrevocable trust (or trusts) at the same insured depository institution. In addition, each trust interest in any irrevocable trust established by two or more Settlors is deemed to be derived from each Settlor pro rata to his or her actual contribution to the trust. Meanwhile, all interests of an irrevocable trust which are deemed to be contingent are added together and insured for up to $100,000, separately from the coverage for non-contingent interests. The FDIC defines a “non-contingent trust interest” as it applies to irrevocable trusts as a trust interest capable of determination without evaluation of contingencies except for those covered by the present worth or life expectancy tables of the Internal Revenue Code. See 12 C.F.R. § 330.13; 12 C.F.R. § 330.1(l).

In order for the special insurance coverage of the revocable trust regulation (12 C.F.R. § 330.10) to be triggered, the revocable trust agreement must provide that at least one qualifying beneficiary shall have a vested interest in the trust upon the death of the last Settlor. One of the requirements of a vested interest is that there is no condition attached to it, which would render it contingent. Because such conditions, or “defeating contingencies,” have a drastic effect on the insurance coverage of a trust, it is important to examine them more closely.

In summary, if you have a Trust (either Revocable or Irrevocable), AND you have deposits in any one banking institution in excess of $100,000, you should carefully review these general rules governing FDIC Insurance and speak to your bank about the specific level of insurance available for YOUR accounts. Again, if you are not completely satisfied at the answers you receive, you should strongly consider maintaining no more than $100,000 in Trust owned bank accounts at any one Banking Institution.