Woman researching on computer about FDIC limits and Trusts

5 minute read

Everything You Need To Know About Trust Accounts & FDIC Insurance Limits

With everything that’s happened in the financial sector, it is time to protect the assets in your trust accounts.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

The collapse of several prominent banks in the wake of rapidly increasing interest rates has shaken Americans’ faith in the financial sector. According to a poll from The Associated Press-NORC Center for Public Affairs Research, “Only 10% of U.S. adults say they have high confidence in the nation’s banks and other financial institutions.”  

The poll also acknowledges that most people aren’t comfortable with how the government is currently regulating the industry. Jerome Powell, the chair of the Federal Reserve, and Treasury Secretary Janet Yellen agree that they need to improve regulation in the banking industry, but no common ground has been found.  

The lack of clarity doesn’t provide peace of mind for those with assets in a trust account. However, grantors and trust account holders don’t have to wait while regulators formulate a plan to improve regulations and their Federal Deposit Insurance Corporation (FDIC) safety net. There are steps grantors can take today to protect their assets from an uncertain future.

This guide will teach you everything you need to know when setting up a trust fund and FDIC insurance, including:

What happened in the financial sector?

Years of government stimuli and unprecedented savings onset by a global pandemic culminated in the fastest rate of inflation the U.S. has seen in decades. As a result, the Federal Reserve responded with several interest rate hikes, each designed to incrementally stem inflation and its lasting impact on the economy. It should be noted, however, that the Fed’s persistent actions revealed significant oversights on behalf of two large regional banks: Silicon Valley Bank and Signature Bank.

Silicon Valley Bank, on the one hand, used customer deposits to invest heavily in bonds when interest rates were low in the last few years. Over a prolonged period, bonds are typically seen as a relatively safe investment vehicle and benefit from lower rates. However, the rapid increase in rates over the last 12 months took a significant toll on bond yields and Silicon Valley Bank’s liquidity.    

Concerned customers began withdrawing funds at an alarming rate — to the tune of $42 billion in a single day. The rate of withdrawals was expedited by fear-mongering on social media platforms and access to online banking. To meet the demand, Silicon Valley Bank had to sell the previously discussed bonds at a loss, which further fueled the bank run.   

Signature Bank, on the other hand, experienced a similar run on withdrawals. Instead of poorly mitigating their exposure to risk in the bond market, however, Signature Bank served several clients whose industries have been negatively impacted by today’s higher interest rates: real estate, cryptocurrency, and other clientele (just to name a few). As withdrawals from Signature Bank began to mount, New York regulators closed the regional bank.     

The lack of risk management and the failure of two large regional banks spread fear and doubt throughout the financial industry. To quell concerns and prevent any more bank runs from occurring, the Treasury, Federal Reserve, and FDIC issued a joint statement confirming the government would backstop and insure depositors at both banks (including those over FDIC insurance limits).

While depositors at Silicon Valley and Signature have been guaranteed they will be made whole (even on deposits over the $250,000 limit covered by FDIC insurance), the government hasn’t yet committed to a similar promise in the future if more bank runs were to happen. As a result, more account holders at banks across the country are starting to wonder if their deposits and trust accounts are safe, especially if they exceed the $250,000 limit covered by FDIC insurance. 

What is FDIC deposit insurance and how does it work? 

As its name suggests, FDIC deposit insurance protects the money held in accounts at FDIC-insured depository institutions. In other words, account holders can rest assured their money is safe, even when their bank fails. If for nothing else, the FDIC’s insurance is backed by the credit of the United States government.  

To be clear, there is a limit to the insurance provided by the U.S. government. According to the FDIC, “Deposits are insured up to at least $250,000 per depositor, per FDIC-insured bank, per ownership category.”

That’s an important distinction, as the amount of FDIC insurance coverage isn’t contingent solely on the number of accounts, but instead on the ownership category the assets fall under. While the standard deposit insurance coverage is limited to $250,000 per depositor, deposits held in trust accounts are subject to different ownership category rules. 

Are Revocable and Irrevocable Trust accounts insured by the FDIC? 

Revocable trusts and irrevocable trusts are each in an ownership category that’s insured by the FDIC. That said, insurance coverage for trust fund distributions can be complicated. Aspiring and current grantors are advised to consult with a qualified professional to ensure their trust accounts are structured in a way that provides sufficient FDIC insurance protection. 

Revocable Trust coverage

Both informal and formal revocable trusts are insured by the FDIC. That means Payable on Death (or POD), in Trust for (or ITF), as Trustee for (or ATF), Living Trust, Family Trusts, and Totten Trust accounts are generally insured up to $250,000  for each unique beneficiary. For the FDIC to insure the account under the revocable trust ownership category, however, the following requirements must be met:

  • The account’s title at the bank has to acknowledge the account is for a Trust 

  • Each beneficiary needs to be named or identified in the appropriate place

  • Each beneficiary must be a living person, a charity, or a non-profit organization  

If the account meets the requirements, calculating the insurance coverage will depend on how many beneficiaries are named in the Trust, the equitable interest of each, and the deposit amount.

If the Trust account has five or fewer unique beneficiaries, the cash held in the account is insured for up to $250,000 for each person. Or, to put it another way, a single revocable Trust with five unique beneficiaries can be insured by the FDIC for up to $1,250,000.  

If the Trust account has six or more unique beneficiaries, and every beneficiaries’ equitable interest in the account is the same, the FDIC insurance is calculated the same way as a revocable trust with five or fewer unique beneficiaries. However, if a Revocable Trust names six or more beneficiaries, each set to receive different amounts, deposits are insured for the greater of the following two scenarios:

  • The total amount of each beneficiary’s interest (up to $250,000 each)

  • The minimum coverage amount ($1,250,000) 

Irrevocable Trust coverage

Deposits held in Irrevocable Trust are insured by the FDIC under the irrevocable trust category. However, due to the conditions typically found in Irrevocable Trusts that impact beneficiaries’ interest in the deposits, insurance coverage is calculated differently from their revocable counterparts. 

Irrevocable Trust accounts are typically only insured up to $250,000. That’s not to say each account at a bank is insured up to $250,000, but rather that all deposits intended to be left to a single beneficiary are added together and insured up to $250,000. Of course, to qualify for insurance, the following requirements must be met:

  • The Trust must be legally validated by state law

  • The bank’s records must disclose the purpose of the Irrevocable Trust account

  • The bank’s deposit account records or the Trustee’s records need to identify the beneficiaries and their equitable interest in the accounts.

  • The amount owed to beneficiaries can’t be contingent, under regulations outlined by the FDIC.

Most Irrevocable Trusts include contingencies for the cash held in their accounts. As a result, most Irrevocable Trusts fail to meet all four requirements listed above. For this reason, most Irrevocable Trusts are only insured up to $250,000 at each FDIC-insured bank. 

How to protect Trust accounts with more than $250,000

The FDIC does take measures to protect the money in Trust accounts, but insurance only covers so much. As a result, Trust account owners may want to take matters into their own hands. Specifically, Trust account owners that exceed the $250,000 maximum set by the FDIC can exercise caution and open accounts at multiple banks.

If Trust account deposits at a single bank exceed the FDIC-insured limit, account holders and grantors should consider spreading their assets across multiple banks. Since most FDIC insurance covers $250,000 per depositor, per FDIC-insured bank, and per ownership category, opening another account at the same bank (or even another branch of the same bank) won't extend FDIC coverage. Instead, protecting excess deposits is as simple as opening accounts at separately chartered banks. That way, deposits at the new bank are covered by their own FDIC insurance, up to $250,000.  

Utilizing different accounts across multiple banks may require a little planning, but the resulting peace of mind may be invaluable.

Trust & Will can help

Recent volatility in the banking sector has had many people questioning whether or not their deposits are safe. Those with Trust accounts over FDIC insurance limits, in particular, are now motivated more than ever to take the appropriate safety precautions. Fortunately, some steps can be taken to preserve capital in high-net-worth accounts.   

With Trust & Will, you can create a fully customizable, state-specific estate plan from the comfort of your own home in just 20 minutes. Take our free quiz to see where you should get started, or compare our other estate planning and settlement options today! 

Is there a question here we didn’t answer? Browse more topics in our learn center or chat with a live member support representative!

Trust & Will is an online service providing legal forms and information. We are not a law firm and we do not provide legal advice.