Are My Trust’s Bank Accounts Fully Insured? Part 3
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 third 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 on the fundamentals of FDIC insurance here: Are My Trust’s Bank Accounts Fully Insured?
Deposit Insurance for Irrevocable Trust Accounts
Irrevocable trust accounts are deposit accounts held in connection with a trust established by statute or a written trust agreement in which the owner (also referred to as a Grantor, Settlor or Trustmaker) contributes deposits or other property to the trust and gives up all power to cancel or change the trust. An irrevocable trust also may come into existence upon the death of an owner of a revocable trust.
A revocable trust that becomes irrevocable due to the death of the trust owner may continue to be insured under the rules for revocable trusts. Therefore, in such cases, the rules in our revocable trust article: FDIC Insurance for Revocable Trusts are used to determine coverage.
The interests of a beneficiary in all deposit accounts under an irrevocable trust established by the same settlor and held at the same insured bank are added together and insured up to $250,000 only if all of the following requirements are met:
- The trust must be valid under state law
- The insured bank’s deposit account records must disclose the existence of the trust relationship
- The beneficiaries and their interests in the trust must be identifiable from the bank’s deposit account records or from the trustee’s records
- The amount of each beneficiary’s interest must not be contingent as defined by FDIC regulations
Trustmaker’s Retained Interest
If the Trustmaker retains an interest in the irrevocable trust, then the amount of the owner’s retained interest would be added to the owner’s other single accounts, if any, at the same insured bank and the total insured up to $250,000.
| Example 7: Irrevocable Trust providing for Trustmaker during his lifetime |
|
| Account Title | Balance |
| John Marshall Irrevocable Trust | $500,000 |
| John Marshall | $500,000 |
Facts:
John Marshall is the Trustmaker of the John Marshall Irrevocable Trust. John is a beneficiary of his trust during his lifetime and his friend Bill serves as Trustee. Upon John’s death, the assets of the irrevocable trust will be distributed to all of Bill’s four children.
Rule
If the grantor of an irrevocable trust is still living, and the trust provides that trust assets can either be used by the grantor or by a trustee on behalf of the grantor, the grantor would be deemed to have a retained interest. Thus, this irrevocable trust account would not be insured under the irrevocable trust ownership category, but as a single ownership deposit of the grantor. The balance of the account would be added together with any other single ownership accounts the grantor has at the same bank, and the total would be insured up to $250,000.
Answer
Both of John Marshall’s accounts, the one in his individual name and the one in the name of his irrevocable trust are collectively insured for $250,000. Because Bob the trustee may provide for John during his lifetime, John has retained an interest in the irrevocable trust and therefore the funds are FDIC insured only as single ownership accounts.
Contingent Interests
The FDIC regulations define a contingent interest as an interest that cannot be determined without evaluation of contingencies other than life expectancy.
The following are examples of contingencies:
- Beneficiaries will not receive funds unless certain conditions are met, such as graduating college
- Trustees have discretion to allocate funds among the beneficiaries. For example, trustees are able to invade the trust principal on a beneficiary’s behalf for any reason, such as paying medical expenses
To the extent the interests of the beneficiaries are contingent, those interests are added together and insured for up to a maximum of $250,000, regardless of the number of beneficiaries. To the extent the interests of the beneficiaries are non-contingent, each beneficiary’s interest is insured up to $250,000.
Insurance Limit for Irrevocable Trust Accounts
One or more deposit accounts in the name of an irrevocable trust are insured up to $250,000 for the “non-contingent trust interest” of each beneficiary. Separately, funds representing “contingent interests” are insured up to $250,000 in the aggregate. Finally, any funds representing a grantor’s “retained interest” are insured to the grantor in the single account category (in aggregation with the grantor’s other single accounts).
The term “non-contingent trust interest” is defined in the FDIC’s regulations as an interest capable of determination without evaluation of any contingencies except those covered by present worth/life expectancy tables. To the extent that the beneficiary’s interest is subject to any other type of contingency, the interest is a “contingent interest.”
Since irrevocable trusts usually contain conditions that affect the interests of the beneficiaries or provide a trustee or a beneficiary with the authority to invade the principal, insurance coverage for an irrevocable trust account usually is limited to $250,000.
Conclusion
While the current rules are complex and the simplifying changes are unlikely to make them much easier to understand. Luckily, the FDIC gives you a handy tool to investigate your deposit insurance coverage under different hypothetical scenarios: https://edie.fdic.gov/calculator.html.
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)? and FDIC Insurance for Revocable Trusts.