Note: if Sam’s and Linda’s joint revocable trust provides that the six children’s interests continue in trust after the deaths of Sam and Linda, the children no longer qualify as beneficiaries under the FDIC rules. Then, the joint revocable trust has no beneficiaries and is instead treated as a joint account owned by Sam and Linda individually.

Let’s look at another example. Say the facts are the same, but 75 percent of the trust property belongs to Sam, which means that Sam’s interest in the joint revocable trust account is $3 million and Linda’s interest in the account is $1 million. The maximum coverage for Sam’s interest will still be $1.5 million (the greater of $1.25 million or the aggregate amount of beneficial interests), but the coverage for Linda’s interest in the trust account cannot exceed her ownership interest, which in this case means that her coverage is limited to her $1 million. Thus, the total maximum coverage for the account would be $2.5 million.

As mentioned earlier, we see a problem with the FDIC’s definition of “beneficiary.” The FDIC concept works well enough for informal trust accounts, since these accounts generally provide outright distributions to named beneficiaries who are listed in the account records of the financial institution.

However, the FDIC applies similar rules to formal revocable trusts and to irrevocable trusts, and limits the concept of “beneficiary” to those who receive interests outright, or who receive certain “life estate” or “income for life” interests. Although these rules may be workable for estate plans that provide only outright distributions, the rules will not work well for estate plans that provide more advanced forms of inheritances, such as continuing trusts, because the trust beneficiaries may not be recognized as “beneficiaries” for FDIC purposes. These advanced forms of inheritances are usually an integral part of the estate plan because they can provide significant tax and non-tax advantages. As a consequence, trusts will qualify for substantially different levels of coverage depending on whether beneficiaries receive their interests on an outright basis. Problems may also arise if trustees allow deposits to exceed the actual coverage available due to confusion over this definition of “beneficiary.”

(7) Irrevocable Trusts—The FDIC rules also create a separate ownership category for irrevocable trusts. Some trusts are irrevocable because they were designed that way from the start (often for tax planning or creditor protection purposes). Other trusts start out as revocable trusts and become irrevocable upon the occurrence of a specific event (often the death of a grantor).

The FDIC rules specifically provide that any irrevocable trust created due to the death of a grantor of a revocable trust will continue to be insured under the “revocable trust” ownership category, rather than the “irrevocable trust” category. The FDIC rules do not provide guidance as to whether multiple coverage limits will apply if multiple irrevocable trusts with the same or similar beneficiaries arise at a grantor’s death (for example, marital and credit shelter trusts may arise at the death of the first spouse to die). Hopefully, further guidance will be forthcoming.

Other irrevocable trusts (that is to say, those not created due to the death of a grantor) are entitled to FDIC insurance coverage in an amount equal to the greater of (a) $250,000 for the entire trust; or (b) the values of the “beneficial interests” of the “beneficiaries” (using the same definitions described above for formal revocable trusts), up to the basic coverage limit (temporarily $250,000) per beneficiary. As a practical matter, most irrevocable trusts will probably be limited to $250,000 of coverage, since most irrevocable trusts contain conditions that cause each beneficiary of the trust to fail to satisfy the FDIC definition of “beneficiary.”

(8) New Rule Protects Non-Interest Bearing Accounts—The FDIC coverage rules are subject to change, as illustrated by the Oct. 14, 2008 announcement that an unlimited coverage limit applies, temporarily, to any account that is non-interest bearing, such as a checking account, regardless of the ownership category. This announcement is particularly welcome news to business accounts that are likely to have higher working balances to cover payroll expenses and the like. But this unlimited coverage is temporary, and expires after Dec. 31, 2009. Unfortunately, the FDIC announcement does not provide guidance as to how the unlimited coverage interacts with the basic limit that might otherwise apply.

For example, Terry owns a savings account with a $300,000 balance and a non-interest bearing checking account with a $600,000 balance. The $600,000 balance in the checking account is clearly covered, but it’s unclear what portion, if any, of the savings account is covered, because the coverage on the checking account might be deemed to come first from the $250,000 basic limit that applies to single accounts and then from the unlimited coverage. Hopefully, more guidance from the FDIC is forthcoming.

NCUA
Note that the National Credit Union Association (NCUA) provides similar insurance coverage for depositors in credit unions, and the act temporarily increases the basic coverage limit provided by the NCUA in the same manner as that of the FDIC. The NCUA coverage rules are similar, but not necessarily identical, to those of the FDIC. For more information about the NCUA rules, visit the NCUA’s web site, www.ncua.gov.