Coverage that applies to accounts for informal and formal revocable trusts is based only on the number of beneficiaries and does not include the owners (who, in the eyes of the FDIC, could establish single or joint accounts to obtain their own coverage under another category). Also, each beneficiary’s interests in each and every revocable trust account held at a financial institution by the same owner are generally subject to one basic coverage limit (temporarily $250,000).

(a) Informal Trust Accounts—Deposit insurance coverage for an informal trust account is determined by multiplying the number of beneficiaries named on the account by $250,000. Note that the beneficiaries must be specifically named in the deposit account records of the insured financial institution.
For example: Jill has an account that is POD to her two children. The account has a balance of $500,000. Assuming Jill has no other revocable trust accounts naming the same beneficiaries, the available insurance coverage is $500,000, because there are two beneficiaries (Jane’s children) named on the account.

Let’s look at another example with the same facts, but say that Jill also has a single ownership account with $275,000. Jill is entitled to $250,000 of insurance coverage on the single account, in addition to $500,000 coverage on her POD account. Only the excess $25,000 held in the single account is not insured.

(b) Formal Trust Accounts—The rules for formal trust accounts have generated confusion over the years. As a result, the FDIC Board of Governors adopted an interim regulation on Sept. 26, 2008, to try and simplify the coverage rules on these accounts. This regulation was revised on Oct. 8, 2008, and more revisions may be needed to resolve remaining questions.

Coverage for formal trusts is provided on a “per beneficiary” basis. The prior rules limited coverage to beneficiaries consisting of the account owner’s spouse, children, grandchildren, parents and siblings. The new, interim rules delete this requirement and extend coverage to any individual or non-profit organization. But note that the FDIC definition of a “beneficiary” is limited, and may still exclude some individuals or charities named in many common types of trusts. More on that later.

The interim regulation describes two different coverage rules. The description in the regulation does not match the discussion provided by the FDIC on its web site, but we think that we’ve captured the concepts intended by the FDIC in this summary:

• Five or fewer beneficiaries—For each trust with five or fewer “beneficiaries” (as defined for FDIC purposes), the maximum coverage at any given financial institution is determined by multiplying the number of different “beneficiaries” (as defined for FDIC purposes) by the basic coverage limit (temporarily $250,000).

So, for example, say that Ann has a living trust account with a balance of $1 million. Ann’s trust provides that upon her death, the trust assets will be distributed outright and free of trust in equal shares to Ann’s three children. Because the children will receive outright distributions at Ann’s death, each qualifies as a beneficiary for FDIC purposes, and the maximum insurance coverage is $750,000 (three times $250,000).

Let’s look at Ann’s situation if she also has a single account worth $300,000. Ann’s single account is insured separately (up to a maximum of $250,000), in addition to the $750,000 coverage in her living trust account, producing total coverage of $1 million. (After Dec. 31, 2009, the single account would be insured up to a $100,000 limit, and the trust account would have coverage up to $100,000 per beneficiary, producing total coverage of $400,000.)

• Six or more beneficiaries—For revocable trust accounts with six or more different beneficiaries, the maximum coverage is the greater of (1) $1.25 million; or (2) the aggregate amount of all the beneficiaries’ “beneficial interests” in the trust, limited to the basic coverage limit (temporarily $250,000) per beneficiary. For purposes of these rules, the term “beneficial interest” refers to the portion of the account that the beneficiary would receive outright upon the grantor’s death (or, in the case of a joint revocable trust, upon the surviving grantor’s death), subject to the requirement that the interest does not depend on the death of another trust beneficiary. Any interest that is not distributed outright is not recognized as a beneficial interest, except for a “life estate” or “income for life” interest, which is automatically assumed to be worth the basic coverage limit (temporarily $250,000). This is a significant limitation in the FDIC coverage rules, as many trusts provide for interests that do not fall into these limited categories (for example, it is common for a beneficiary’s interest to continue in trust after the grantor’s death).

So say that Jim has a living trust account with a balance of $1.5 million. Jim’s trust provides that upon Jim’s death: (a) his three children are each entitled to $200,000 (outright and free of trust); (b) Jim’s friend is entitled to $10,000; (c) a designated charity is entitled to $100,000; and (d) the remainder of the trust assets is to be distributed outright to Jim’s wife, Susan. In this case, the balance of the account is over $1.25 million and there are more than five beneficiaries. Thus, the maximum coverage available for this account is the greater of $1.25 million, or the aggregate of each different beneficiary’s interest, limited to $250,000 per beneficiary. The beneficial interests in the trust for purposes of determining coverage are: $200,000 for each of the children (totaling $600,000); $10,000 for the friend; $100,000 for the charity; and $790,000 for Susan (limited to $250,000); or $960,000 in all. Thus, the FDIC coverage on the account is $1.25 million (the greater of $1.25 million or $960,000).

Let’s say we have the same fact pattern but that Jim has five children instead of three, who are each entitled to $200,000. Again, because the balance of the account is over $1.25 million and there are more than five different beneficiaries named in the trust, the maximum coverage available on the account is the greater of $1.25 million, or the aggregate of each different beneficiary’s interest, limited to $250,000 per beneficiary. Now, the beneficial interests in the trust for purposes of determining coverage are: $200,000 for each of the children (totaling $1 million); $10,000 for the friend; $100,000 for the charity; and $250,000 for Susan ($390,000, subject to the $250,000 limit per beneficiary); or $1.36 million in all. Thus, the FDIC coverage on the account is $1.36 million (the greater of $1.25 million or $1.36 million).

• No beneficiaries—If an account is held by a revocable trust that does not have anyone who qualifies as a beneficiary, the account is viewed as falling into the ownership category associated with a single account (for a one-grantor trust) or a joint account (for a two-grantor trust), and would be aggregated with any other single or joint accounts, as the case may be.

• Joint revocable trust—It is common in community property states for two grantors to form a revocable trust. With a joint revocable trust account, each owner’s interest is analyzed separately, subject to the same limits described above. In other words, when a husband and wife establish a joint revocable trust, they are each deemed to be a separate grantor of the trust for purposes of determining insurance coverage.

For example, Sam and Linda create a joint revocable trust with an account balance of $4 million. They have no children of their marriage, but Sam has four children from a prior marriage, and Linda has two children from a prior marriage. Sam and Linda want to treat all six children equally, and under the terms of the trust, upon the surviving spouse’s death, the trust assets will be divided into six equal shares and distributed outright to the six children. Sam and Linda each own equal interests in the trust. Under the FDIC rules, each of Sam’s and Linda’s interests is analyzed separately. The coverage for each of Sam’s and Linda’s interests is the greater of $1.25 million or the aggregate amount of the beneficial interest of each beneficiary (limited to $250,000 per beneficiary). Sam’s and Linda’s interests represent $2 million each, and the six children’s respective interests in each is $333,333. But coverage cannot exceed $250,000 per beneficiary, so the beneficial interests of the beneficiaries is considered to be $1.5 million (six times $250,000). This amount exceeds $1.25 million, so each of Sam’s and Linda’s interests is covered for $1.5 million and the account qualifies for aggregate coverage of $3 million ($1.5 million each for Sam and for Linda). If Sam and Linda also own a “joint account” as individuals of $500,000, their combined coverage is $3.5 million.