Jane Dotson
Trust accounts are a type of financial account opened by one person for the benefit of another. They are set up to be managed by a trustee of the account owner's choice. Trust accounts are insured by the Federal Deposit Insurance Corporation (FDIC) as are traditional bank accounts. The FDIC insurance covers traditional deposit accounts, and depositors do not need to apply for it. Coverage is automatic when a deposit account is opened at an FDIC-insured bank. The FDIC insurance coverage for trust accounts is calculated by multiplying $250,000 by the number of beneficiaries, with a maximum insurance amount of $1,250,000 per owner if five or more beneficiaries are named.
| Characteristics | Values |
|---|---|
| What is a trust account? | A type of financial account opened by one person for the benefit of another. |
| Who manages it? | A trustee of the account owner's choice. |
| Who is it insured by? | Federal Deposit Insurance Corporation (FDIC) |
| What does FDIC insurance cover? | Traditional deposit accounts, including checking accounts, savings accounts, money market deposit accounts, and CDs. |
| How much is the standard maximum insurance amount? | $250,000 per depositor, per insured bank, for each account ownership category. |
| What is the maximum insurance amount for trust accounts? | $250,000 per eligible beneficiary, up to a maximum of $1,250,000 if five or more eligible beneficiaries are named. |
| What is the formula for calculating the insurance amount for trust accounts? | Number of owners x Number of beneficiaries x $250,000 = Amount insured (not to exceed $1,250,000 per owner for all trust accounts) |
| Are there different types of trust accounts? | Yes, there are informal revocable trust accounts and formal revocable trust accounts. |
| What is an example of an informal revocable trust account? | Payable on Death (POD) account. |
| What is required for an informal revocable trust account to be insured? | The beneficiaries must be specifically named in the IDI's deposit account records. |
| What is an example of a formal revocable trust account? | Deposit held in the name of a living trust. |
| What is required for a formal revocable trust account to be insured? | The account title must include terminology identifying it as a trust account, or the IDI's deposit account records must identify the account as such. |
| Are there any considerations for beneficiaries? | Yes, in community property states, the spouse of the decedent may be entitled to half of the account. |
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What You'll Learn
Trust accounts insured by the FDIC
Trust accounts are insured by the FDIC, which covers traditional deposit accounts. When a deposit account is opened at an FDIC-insured bank, coverage is automatic. Trust accounts are considered deposits held by one or more owners under either an informal revocable trust, a formal revocable trust, or an irrevocable trust.
Informal revocable trusts, also known as payable-on-death (POD) or Totten trust accounts, are created when the account owner signs a deposit account agreement, directing the bank to transfer the funds to one or more named beneficiaries upon their death. These beneficiaries must be specifically named in the IDI's deposit account records for the account to be insured under the Trust Accounts category.
Formal revocable trusts, often called living or family trusts, are written trusts created for estate planning purposes. The owner controls the deposits and other assets in the trust during their lifetime. For a formal revocable trust account to be insured, the account title must include terminology that identifies it as a trust account, or the IDI's deposit account records must otherwise identify it as such.
Irrevocable trusts are established by statute or a written trust agreement, where the owner contributes deposits or property and gives up all power to cancel or change the trust. Deposit insurance coverage for irrevocable trust deposits is calculated in the same way as for revocable trust deposits.
The FDIC's regulations govern the coverage of deposits of both revocable and most irrevocable trusts. An owner's trust deposits are insured for up to $250,000 per eligible beneficiary, with a maximum of $1,250,000 if five or more eligible beneficiaries are named. If a trust has multiple owners, each owner's insurance coverage is calculated separately, and the deposit insurance limit is applied to the combined total.
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Rules for insured accounts owned by trusts
Trust accounts are insured by the Federal Deposit Insurance Corporation (FDIC) in the US. The FDIC has specific rules for insured accounts owned by trusts, which came into effect on April 1, 2024. These rules apply to both revocable and irrevocable trusts, simplifying the previous complex differences between the two.
For an informal revocable trust account, such as a payable-on-death account, to be insured, beneficiaries must be specifically named in the insured depository institution's (IDI) deposit account records. This requirement does not apply to formal trusts, where beneficiaries are usually identified in the formal trust agreement. Formal revocable trusts, such as living or family trusts, are created for estate planning purposes, and the owner controls deposits and assets during their lifetime.
The FDIC insurance calculation for trust accounts is based on the number of owners and beneficiaries of the trust. Each owner's insurance coverage is calculated separately, and the number of owners multiplied by the number of beneficiaries is then multiplied by $250,000, up to a maximum of $1,250,000 per owner if five or more eligible beneficiaries are named. Trustee designations generally do not affect insurance coverage, and while beneficiaries are a factor in the calculation, they are not considered the owners of the deposited funds.
The FDIC's rules do not require beneficiaries of a formal trust to be specifically named, but the designation must be specific enough to identify the intended beneficiary, such as "my children and grandchildren". The rules do not affect the distribution of funds upon the owner's death, only the level of deposit insurance coverage.
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Trust accounts with multiple owners
Trust accounts are insured by the Federal Deposit Insurance Corporation (FDIC). FDIC insurance covers traditional deposit accounts, and depositors do not need to apply for it. Coverage is automatic whenever a deposit account is opened at an FDIC-insured bank or financial institution.
If a trust has multiple owners, each owner's insurance coverage is calculated separately. Each co-owner of a joint account is insured up to $250,000 for the combined amount of their interests in all joint accounts at the same IDI. The FDIC assumes each co-owner is an equal co-owner unless the IDI records clearly indicate otherwise.
For example, consider a married couple, Paul and Lisa Li, who are co-grantors of a revocable living trust that designates their two children, John and Sharon, as beneficiaries. Paul is presumed to own one-half of the $700,000 living trust account, meaning his interest in the trust account is $350,000. He has named two beneficiaries—John and Sharon. His trust account coverage is calculated as follows: Paul's Coverage = 1 owner x 2 beneficiaries x $250,000 = $500,000. Therefore, Paul's $350,000 trust deposit is fully insured.
Lisa is presumed to own the remaining $350,000 share of the living trust account, and she is the sole owner of the $450,000 POD account. Lisa's trust deposits total $800,000. She has named three beneficiaries—Paul, John, and Sharon. Her trust account coverage is calculated as follows: Lisa's Coverage = 1 owner x 3 beneficiaries x $250,000 = $750,000. Lisa's $800,000 in trust deposits exceeds her $750,000 in coverage, resulting in $50,000 uninsured.
In summary, Paul and Lisa's trust account deposits total $1,500,000, with $800,000 uninsured as it exceeds the insurance limit.
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Requirements for insured revocable trust accounts
Trust accounts are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC's regulations govern the coverage for deposits of both revocable and irrevocable trusts. The insurance coverage for revocable trust accounts depends on whether the trust is a living trust or a formal/informal revocable trust.
For living trusts, a two-step analysis is required to determine the extent of insurance coverage. Firstly, the relationship between the settlor and the beneficiaries must be considered. To qualify for separate insurance coverage, the beneficiary must be the spouse, child, grandchild, parent, or sibling of the settlor. Secondly, the terms of the living trust must not subject the beneficiary's interest to a "defeating contingency".
For formal revocable trusts, the account title must include terminology that identifies the account as a trust account, or the IDI's deposit account records must identify the account. Formal trusts often identify beneficiaries in the formal trust agreement.
Informal revocable trusts, on the other hand, require beneficiaries to be specifically named in the IDI's deposit account records. These are commonly referred to as payable on death (POD), in trust for (ITF), as trustee for (ATF), transfer on death (TOD), or Totten trust accounts. These trusts are created when an account owner signs an agreement directing the IDI to transfer funds to named beneficiaries upon their death.
The FDIC's deposit insurance covers trust accounts with up to five eligible beneficiaries, with a maximum of $1,250,000 per owner. Each eligible beneficiary is insured for up to $250,000.
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Irrevocable trust accounts insurance
Trust accounts are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC covers traditional deposit accounts, and depositors do not need to apply for FDIC insurance. Coverage is automatic when a deposit account is opened at an FDIC-insured bank or financial institution.
As of April 1, 2024, the FDIC’s regulation at 12 C.F.R. § 330.10 governs coverage for deposits of both revocable trusts and most irrevocable trusts. Irrevocable trusts are established by statute or a written trust agreement in which the owner contributes deposits or other property to the trust and gives up all power to cancel or change the trust.
The FDIC's new rule simplifies the deposit insurance rules for trust accounts, eliminating the complex differences between the revocable and irrevocable trust rules. Under the new rule, a deposit owner’s trust deposits will be insured up to $250,000 for each trust beneficiary, not to exceed five beneficiaries per insured bank, regardless of whether a trust is revocable or irrevocable. If a trust owner has identified more than five eligible beneficiaries for a trust account, the owner will not be insured beyond $1,250,000 for deposits at that IDI.
If a trust has multiple owners, each owner’s insurance coverage is calculated separately. All deposits that a depositor holds in informal revocable trusts, formal revocable trusts, and irrevocable trusts at the same IDI are added together for deposit insurance purposes, and the deposit insurance limit is applied to the combined total.
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Frequently asked questions
Trust insurance is a type of financial account opened by one person for the benefit of another. Trust insurance covers traditional deposit accounts, and depositors do not need to apply for it. Coverage is automatic when a deposit account is opened at an insured bank or financial institution.
The amount of FDIC insurance coverage depends on the ownership category. For single accounts, the coverage limit is $250,000. For trust accounts, the coverage is up to $250,000 per eligible beneficiary, with a maximum of $1,250,000 for five or more beneficiaries.
Revocable trusts are created when the account owner signs a deposit account agreement, directing the bank to transfer the funds to one or more named beneficiaries upon the owner's death. Irrevocable trusts are deposit accounts held in connection with a trust established by statute or a written trust agreement, where the owner gives up all power to cancel or change the trust.
For informal revocable trusts, beneficiaries must be specifically named in the deposit account records. For formal revocable trusts, the account title must include terminology sufficient to identify the account as a trust account, or the deposit account records must identify the account as such. To qualify for insurance, the terms of a living trust must not be subject to a "defeating contingency", which would prevent the beneficiary from acquiring a vested interest in the funds upon the owner's death.
