Are My Trust’s Bank Accounts Fully Insured? Part 2
Recently we have been receiving questions from our clients about the amount of Federal Deposit Insurance Corporation (FDIC) insurance coverage their revocable trusts have on their bank accounts. This article is the second article in a series of blog posts written to explain the current FDIC deposit insurance rules, and in particular how they apply to trusts. You can find the first article here: Are My Trust’s Bank Accounts Fully Insured?
Deposit Insurance Coverage for Revocable Trusts
When a revocable trust owner names five or fewer beneficiaries, the owner’s trust deposits are insured up to $250,000 for each unique eligible beneficiary. The term revocable trust owner applies to the Trustmaker (also called a settlor) of a formal revocable living trust, as well as the named depositor/account holder of a payable on death (POD) account. The FDIC considers POD accounts to be informal trust accounts. Non-Trustmaker trustees are not considered account owner’s for FDIC insurance purposes despite being named on the title to the account.
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. However, the FDIC views trust beneficiaries differently than you would expect. The FDIC does not consider the Trustmaker as a beneficiary of their own trust for deposit insurance purposes. The conventional view is that a Trustmaker is a beneficiary of their own trust during their lifetime. The FDIC does not view it that way. However, as we show you in the examples below, the FDIC does consider a spouse and other beneficiaries (children and non-related) as countable beneficiaries for FDIC insurance purposes.
Formal Revocable Living Trusts as Named Account Owners
Trust with 4 Unique Eligible Beneficiaries
|Kevin Upton trustee of the Kevin Upton Living Trust
Kevin Upton creates the Kevin Upton Living Trust which names him as a beneficiary during his lifetime and then his four children upon his death.
Trustmaker’s are not considered beneficiaries of the Trust for deposit insurance purposes
The deposit insurance amount of $250,000 is multiplied times the number beneficiaries at the time of the Trustmaker’s death, which equals $1,000,000. The FDIC ignores Kevin’s interest and provides deposit insurance of $1,000,000 and leaves the remaining $250,000 uninsured.
Trust with 5 Unique Eligible Beneficiaries
|Kevin Upton trustee of the Kevin Upton Living Trust
Kevin Upton creates the Kevin Upton Living Trust which names him as a beneficiary during his lifetime and then his five children upon his death.
Trustmaker’s are not considered beneficiaries of the Trust for deposit insurance purposes
The deposit insurance amount of $250,000 is multiplied times the number beneficiaries at the time of the Trustmaker’s death, which equals $1,250,000. This is the maximum amount of deposit insurance coverage applicable to trust accounts, regardless of if there were six or more beneficiaries.
Life Estate Beneficiaries
A common situation in formal revocable trust agreements is the existence of a life estate beneficiary who has the right to receive either income or the use of some or all of the trust assets during his or her lifetime, with the remaining trust assets passing to remainder beneficiaries upon the life estate beneficiary’s death. In the case of such trusts, both the life estate beneficiary and the remainder beneficiaries are considered primary beneficiaries for purposes of calculating deposit insurance coverage. In most trusts, the life estate beneficiary is the surviving spouse.
Trust Granting Life Estate to Spouse and then to children
|Bill Sample Living Trust
Bill Sample deposits $1,250,000 into a savings account at ACME Bank titled in the name of the Bill Sample Living Trust. The trust provides for Bill during his lifetime and then gives his wife Mary the right to use trust assets during her lifetime with any remaining assets split equally among their three children Alice, Bob, and Charlie. Assuming no other trust accounts owned by Bill at the same bank, the account would be FDIC insured for $1,000,000. That is $250,000 for Mary’s interest as well as the interest of each of their children.
Deposits Opened “POD to a Revocable Trust”
If a POD account designates a formal revocable trust wholly owned by the accountholder as a beneficiary, the FDIC will consider the beneficiaries of the POD account to be the beneficiaries of the formal revocable trust. The FDIC will insure the deposit as an account titled in the name of the formal trust. This treatment is applicable only if the owner (or co-owners) of the deposit account owns 100% of the formal revocable trust named as beneficiary. In other words, the named owner of the POD account must be the Trustmaker of the formal revocable trust.
Thus, an account owned by John Smith that is titled “John Smith POD to the John Smith Revocable Trust” would be insured as if the account were titled in the name of “the John Smith Revocable Trust”. The beneficiaries of the John Smith Revocable Trust would be considered the beneficiaries of the POD account. Similarly, an account owned by John and Mary Smith that is titled “John and Mary Smith POD John and Mary Smith Family Living Trust” would be insured the same as an account titled in the name of the co-owned trust.
Beneficiaries Must be
The rules provide that a deposit can be insured as a revocable trust account only if either the revocable trust instrument or the deposit account records identify and designate an eligible beneficiary.
An eligible beneficiary must be one of the following:
- a natural person (human being)
- a charitable organization (that is recognized as such under the Internal Revenue Code)
- a non-profit entity (that is recognized as such under the Internal Revenue Code)
Eligible beneficiaries identified in a formal revocable trust document or, in the case of an informal revocable trust, in the bank’s deposit account records, are the basis for determining the maximum deposit insurance coverage available for an owner’s revocable trust account(s). In some trusts, grantors designate beneficiaries which are not eligible. Those beneficiaries generally fall within two categories:
- An ineligible beneficiary does not meet the requirements of an eligible beneficiary but is still able to legally receive the bequest under state law. Ineligible beneficiaries include, but are not limited to, for-profit business entities and pet trusts. For purposes of calculating deposit insurance coverage, when a beneficiary is ineligible, the result is a reversion of the funds to the single account of the grantor.
- An invalid beneficiary is unable to legally receive the bequest under state law. For example, under some state laws, a pet might be an invalid beneficiary. Depositors should consult an attorney with respect to specific state laws. For purposes of calculating deposit insurance coverage, bequests to invalid beneficiaries are ignored and funds are allocated to the remaining beneficiaries.
Trust Account with one invalid beneficiary; one single account
|Jack Smith Living Trust
Jack Smith is the owner of the Jack Smith Living Trust that was established twenty years ago and designated his parents as the primary beneficiaries. Jack’s parents are both now deceased, leaving no living beneficiaries and a pet trust as the sole beneficiary of the trust. Jack establishes at his local bank an account in the name of the Jack Smith Living Trust with a balance of $200,000. At the same bank, Jack also holds a single account titled in his name with a balance of $100,000. These two accounts are the only deposits owned by Jack at that bank. Jack is inquiring about his deposit insurance coverage.
When a revocable trust names an ineligible beneficiary, the FDIC will ignore the designation in calculating deposit insurance coverage and insure the funds in the ownership category that applies to the owner(s).
Although a pet trust may be a valid trust beneficiary under applicable state law, it is not an eligible beneficiary for deposit insurance purposes. FDIC regulations, consider the Jack Smith Living Trust as Jack Smith. Since Jack also has a $100,000 single account in his name at the same bank, the FDIC calculates his total deposit as $300,000. This means that his deposits are insured for $250,000 and the remaining $50,000 is uninsured.
Naming Someone Else’s Trust
If an individual names her own trust as the beneficiary of her bank account then she will receive the FDIC insurance protection for up to five beneficiaries. However, if an individual names a joint trust as the beneficiary of her individual bank account, then she will not receive the full FDIC insurance coverage. Similarly, if an individual designates a formal revocable trust owned in whole or in part by someone other than the accountholder, the account will be deemed to have designated an ineligible beneficiary and will be insured as the single ownership funds of the accountholder.
POD account naming owner’s trust; POD account naming someone else’s trust
|Kevin Upton POD Kevin Upton Living Trust
|Kevin Upton POD Theresa Upton Living Trust
Kevin Upton is the trustmaker of the Kevin Upton Living Trust that designates his wife and son, Theresa and Tommy, as primary beneficiaries. Kevin has two deposit accounts at his local bank – a $380,000 CD payable on death to his own Kevin Upton Living Trust, and a $50,000 CD payable on death to the Theresa Upton Living Trust (which names Kevin and Tommy as its sole beneficiaries). What is Kevin’s deposit insurance coverage?
When an individual designates his formal revocable trust as beneficiary of an informal revocable trust account, the FDIC will consider the beneficiaries of the trust to be the beneficiaries of the POD account. When a formal revocable trust designates an ineligible beneficiary, the FDIC will insure the funds allocated to that ineligible beneficiary as the single ownership funds of the owner(s).
Since Kevin designated his own formal revocable trust as beneficiary of the $380,000 CD, the FDIC considers Theresa and Tommy to be the account beneficiaries and will insure the account for up to $500,000 (1 owner x 2 beneficiaries x $250,000). In contrast, Kevin’s naming of another person’s (Theresa’s) revocable trust as beneficiary of the $50,000 CD is an ineligible beneficiary designation. As a result, that account will be insured as Kevin’s single account. Since Kevin has no other single accounts at this bank, the $50,000 CD is also fully insured.
Examples of invalid beneficiaries:
- a fictional person;
- any object or entity that is an ineligible beneficiary andwould not be eligible to receive the bequest under state law when the owner dies.
POD account with two owners and one invalid beneficiary; one single account
|Jane and Robert Smith POD Sherlock Holmes
Jane and Robert Smith are owners of a $500,000 POD account that designates Sherlock Holmes as the beneficiary, their favorite character from a book. At the same bank where that POD account is held, Jane Smith also has an account in her individual name with a balance of $220,000. These two accounts are the only deposits owned by Jane and Robert at the bank.
When a revocable trust names an invalid beneficiary, allocation of funds to that beneficiary is deemed to have never occurred. When an account does not meet the requirements of a particular category, the funds will revert to the category of the remaining title.
Since Sherlock Holmes is a fictional character, he is neither a valid beneficiary under applicable state law nor an eligible beneficiary for deposit insurance purposes. Therefore, the FDIC will ignore the POD designation and view it as if it had never occurred. As a result, with no designated beneficiary, the account will not be insured as revocable trust account. Instead, the funds will be insured based solely on the actual account ownership. Since the account is owned jointly by Jane and Robert with the two of them having equal withdrawal rights and, from a deposit insurance perspective, naming no beneficiaries, the POD account will be insured as a joint ownership account. Moreover, since neither Jane nor Robert have any other joint deposits at the bank, the account is eligible for up to $500,000 in deposit insurance coverage as a joint account and is fully insured. Jane’s $220,000 single account at the same bank is fully insured, since it is the only single account owned by Jane at that bank.
What is a “Primary” Beneficiary?
A primary unique beneficiary is the person or entity entitled to an interest in the trust deposits when the owner dies.
Sometimes the trust agreement will provide that if a primary beneficiary predeceases the owner, the deceased beneficiary’s share will pass to an alternative or contingent beneficiary. Regardless of such language, if the primary beneficiary is alive at the time of a bank’s failure, only the primary beneficiary, and not the alternative or contingent beneficiary, is taken into account in calculating deposit insurance coverage. For deposit insurance purposes, a beneficiary’s interest in the trust deposits as of the date of a bank’s failure must not depend upon the death of another beneficiary.
In formal revocable trusts, while the naming of specific persons is preferable, it is not required provided the description of the beneficiaries is sufficient to determine their identities and beneficial interests. For example, descriptions of beneficiaries that can be specifically verified such as “my parents,” “my issue (children),” “my spouse,” “my grandchildren,” are all acceptable. However, a designation such as “my family” is not specific enough and would not be acceptable.
About the Author
This article was written by Benjamin Inman, an estate and business planning attorney at Insight Law.
For the other articles in this series see: Are My Trust’s Bank Accounts Fully Insured (Fundamentals of FDIC Insurance)?