I’ve received many calls from clients wondering whether their Certificates of Deposit are totally insured under the FDIC insurance rules. There’s a lot of confusion as to whether and how much of your deposits may be insured at one bank.
You may be surprised to learn that the FDIC provides more insurance for revocable trusts that have multiple beneficiaries. A good web site that reviews the various rules can be found at https://www.fdic.gov/deposit/covered/trust.html. This website takes you through a process wherein you enter your information and it tells you whether you are insured. As with any such important matters, you should verify that you have properly entered the information and that the information is correct with your own professionals.
Many don’t realize that you can obtain greater protection under the FDIC rules with revocable trusts than you might by having the account solely in your name. In general, all deposits which an owner has a “formal” trust (such as a Revocable Living Trust) and that trust has a different number of beneficiaries are added together for FDIC insurance purposes, and the $250,000 insurance limit is applied to each beneficial interest.
In order to “qualify” for an insurable deposit held by a trust, the trust must meet several requirements. The trust must be identified as a living trust or a family trust, at the time that the bank fails, the beneficiary must be entitled to his or her interest in the revocable trust assets at the grantor’s death. The FDIC recognizes life estate and remainder beneficiaries, but not contingent beneficiaries. Finally, the beneficiaries must be living individuals and/or an IRS qualifying charity or nonprofit organization.
Assume that John Does establishes a trust account at his bank, and both the trust document and the bank records reflect that his wife Mary is to receive a lifetime income interest, and upon her death the account is divided into three equal shares among their three children, then the account may qualify for $1,250,000 of FDIC insurance, presuming that neither Mary nor her children have no other insured accounts at that bank. The number of beneficiaries is limited to five pursuant to the rules.
Under the rules, when a revocable trust owner designates five or fewer beneficiaries, the owner’s share of each trust account is added together and the owner receives up to $250,000 in insurance coverage for each unique beneficiary. Formal and informal revocable trust accounts held by the same owner(s) are added together prior to determining coverage.
I have learned anecdotally that some bankers are suggesting to their customers to move current deposits into POD (Pay on Death) or ITF (In Trust For) accounts. You should be very careful before doing so as such a move might actually thwart your estate plan. Pay on Death and In Trust For accounts distribute to the named payee despite anything to the contrary contained within your Revocable Living Trust. Further, they distribute without regard to administration expenses or taxes, further complicating your administration in the event of your demise.
If you already have a revocable living trust, there is no need for a POD or TOD account. Your Successor Trustee will be able to write your checks and pay your bills for you, as they will have instant access to the accounts on your disability or death. Further, the trust avoids the probate process and will divide your trust estate for the beneficiaries you name. If a beneficiary predeceases you, the trust usually takes care of that. In a POD account a predeceased beneficiary could become a costly headache involving probate.
Before you change the title to your accounts, you should consult with your estate planning professionals.
©2016 Craig R. Hersch