New FDIC insurance rules for living trust bank accounts
By Julius Giarmarco
Giarmarco, Mullins & Horton, P.C.
The Federal Deposit Insurance Corporation (FDIC) insures bank accounts against a bank failure. The FDIC limits are per bank -- not per account. Generally accounts are insured for $100,000 per depositor for each bank; but, as a part of the Emergency Economic Stabilization Act of 2008, the amount of insurance has been increased to $250,000 until December 31, 2009. This article will focus on how the FDIC rules apply to revocable living trust accounts. On May 20, 2009, the Helping Families Save Their Homes Act extended the temporary increase through December 31, 2013. On January 1, 2014, the coverage is scheduled to return to $100,000.
There are some special rules for accounts held through living trusts. Living trust accounts are insured up to $250,000 ($100,000 after December 31, 2013) per grantor for each named beneficiary, provided the account title at the bank indicates that the account is in the name of a trust and the beneficiaries are individuals or charities. The beneficiaries are those persons entitled to an interest in the trust when the grantor dies, including a beneficiary receiving a life estate interest. But, contingent or alternate trust beneficiaries are not considered to have an interest in the trust as long as the initial or primary beneficiaries are living. Only the interests of the beneficiaries are insured; those of the grantor(s) of the living trust are not insured.
New rules for living trusts
Effective September 26, 2008, the FDIC simplified the rules for determining the insurance coverage available to living trust accounts. The new rules eliminate the "qualifying beneficiary" requirement, which based the insurance coverage on a beneficiary's relationship to the grantor of the trust (i.e., spouse, child, grandchild, parents and siblings), to cover any individual or charity. But, FDIC coverage is now based on the number of beneficiaries.
Five or fewer beneficiaries or $1,250,000 or less in insurable deposits -- Under the new rules, a living trust with fewer than five different beneficiaries named in the trust agreement or with insurable deposits of $1,250,000 or less will be insured up to $250,000 per beneficiary. The maximum coverage is calculated by multiplying the number of beneficiaries by $250,000 -- regardless of the beneficiaries' proportionate interests in the trust.
More than five beneficiaries and more than $1,250,000 in assets -- For living trusts with more than $1,250,000 of insurable deposits and more than five different beneficiaries named in the trust agreement, the insurance coverage is the greater of $1,250,000 or the sum of all of the beneficiaries' proportional interests in the trust, limited to $250,000 per beneficiary. The new rules also value a life estate beneficiary's interest in a living trust account at $250,000, and provide that, upon the grantor's death (when the living trust becomes irrevocable), the revocable trust rules will continue to govern the account.
On January 1, 2014, the $250,000 and $1,250,000 amounts referred to above are scheduled to drop back to $100,000 and $500,000, respectively.
Examples (through December 31,2013):
- A mother has a living trust from which her three children will inherit equally upon her death. She is insured for $750,000 (3 x $250,000 per beneficiary).
- A husband's living trust creates a life estate for his wife upon his death, with the remainder going to his two children upon his wife's death. Since a life estate interest is valued at $250,000, the trust account is insured for up to $750,000 (3 x $250,000 per beneficiary.)
- A husband and wife are co-grantors of a living trust. Upon the death of the surviving grantor, the assets in the trust pass to their three children. The trust is insured for $750,000 per grantor, or a total of $1,500,000.
- A grantor has a living trust with five beneficiaries and deposits of $1,250,000. Four of the beneficiaries will each receive 5 percent of the trust assets upon the grantor's death, and the other beneficiary will receive the remaining 80 percent of the trust assets. The total insurance coverage is $1,250,000 (despite the disproportionate shares).
- A grantor has a living trust with eight beneficiaries. The first four beneficiaries are the grantor's children, who will each receive 20 percent of the turst upon their father's death. The other four beneficiaries are charities which will each receive 5 percent of the trust property upon the grantor's death. The insurance coverage is $250,000 per child (i.e., $1,500,000 x 20 percent = $300,000, but limited to $250,000), and $75,000 per charity (i.e., $1,500,000 x 5 percent), for total coverage of $1,300,000 ($1,000,000 for the four children and $300,000 for the four charities).
- A grantor has a living trust account with $1,500,000 of deposits. The living trust has six beneficiaries -- the first five will each receive 1percent of the trust property upon the grantor's death and the sixth will receive 95 percent of the trust property. The grantor is insured for $1,250,000 under the "greater of" rule described above (even though the sixth beneficiary is receiving more than $250,000).
While the FDIC has simplified the coverage rules for living trust accounts, it is still somewhat complicated to determine the total coverage a person or couple can have at one bank. There is coverage for deposits in different categories (i.e., individual accounts, joint accounts, POD accounts, living trust accounts, irrevocable trust accounts, IRAs, accounts in the names of entities, etc.), and the coverage depends on the number of owners, grantors and beneficiaries, and upon the terms of any trust accounts. For an online tool to calculate the FDIC insurance for each bank, go to www.myFDICinsurance.gov, where you will find the FDIC's Electronic Deposit Insurance Estimator (EDIE). EDIE is an interactive application that calculates the exact amount of coverage available, assuming the account information (i.e., current balances, names of all account owners/grantors and beneficiaries) is correctly entered.
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