You’ve probably heard of the FDIC, or the Federal Deposit Insurance Corporation, especially given recent news about failed banks. But if you have an Estate Plan in place, you should also be aware that FDIC insurance can protect Trust accounts from certain risks.
Unlike personal accounts which are limited to $250,000 per depositor (for a joint account, $500,0000), trust accounts are protected up to $250,000 per beneficiary. In other words, if you and your spouse create a Trust account for four children, that account would be insured up to $1,000,000, not just $500,000. This is another benefit to using a Trust for passing your estate rather than a Will.
The Basics of FDIC
Bank failures are relatively uncommon, and most depositors haven’t the time to research how the bank they work with manages its investments. Instead, they think of banks much like a physical “piggy bank”: a place to park their money, with the added convenience of being able to streamline financial transactions like paying bills and moving money more easily than if they had to carry cash.
However, banks can use some of the depositors’ funds for investing. This is how banks make money: they utilize their depositors’ funds to make investments that, hopefully, provide a substantial return. While the bank is profitable, depositors’ funds are safe: the bank has sufficient assets to cover the total value of the deposits.
Many regulations govern how banks operate and manage risk. Still, these regulations cannot entirely prevent banks from making poor investment decisions. Unfortunately, it can fail when this happens on a large scale, such that the bank cannot cover its depositors’ funds. To protect depositors, the federal government created a contingency plan that insures depositors’ funds. The FDIC provides this insurance.
Premiums paid by member banks fund FDIC insurance. The insurance provides a backstop for depositors, giving them peace of mind that their deposits are secure. This insurance comes into play only when a bank fails. However, there are limitations on what FDIC insurance covers.
FDIC Protection for Trust Accounts
Before delving into the details, be aware that FDIC changed its rules regarding Trusts in January 2022; the new regulation will go into effect on April 1, 2024. However, the primary import of the rule change was to create one common rule for both revocable and irrevocable Trusts instead of subjecting them to differing treatment.
When you create a Trust, the first step is to fund it by transferring into it the property that you want the Trust to hold. For example, Trusts can contain assets like houses, jewelry, investments, and cash. In legal terms, a Trust is a separate entity from the Grantor (the person who creates the Trust). So, to fund the Trust, the Grantor must transfer these assets into the Trust’s ownership. In most cases, the Trustees, who have a duty to manage the Trust’s assets, will deposit cash assets into a bank account held by the Trust. Trustees manage this Trust account for the benefit of the Trust’s beneficiaries.
For example, suppose a couple decides to create a Trust to benefit themselves and their two grown children. The Trust allows them to pass on the Trust’s assets to their children without a Will when they pass away while still allowing them to support themselves in their later years using the Trust’s assets. Accordingly, they transfer $1,000,000 into the Trust and create a Trust account at a bank that is FDIC insured to hold these assets.
Under current FDIC laws, depositors are insured up to $250,000 per account. But what about this Trust? Does that mean that, if the bank fails, the Trust cannot recover $750,000 of the deposit amount? Under FDIC regulations, if the Trust meets all FDIC requirements, the amount protected would be up to $250,000 per beneficiary or the entire amount. In other words, because there are four beneficiaries of the Trust – the two spouses and their two children – and the FDIC maximum is $250,000 per beneficiary, FDIC insurance would cover $1,000,000, which is the account’s total value.
Protect Your Trust’s Assets
To ensure that your Trust’s assets are protected, you must confirm that the Trust account you create is at a bank that is FDIC insured. In addition, you will have to set up your Trust to comply with all the requirements for FDIC coverage. FDIC limits coverage to $250,000 per beneficiary. Current regulations protect all Trusts up to $250,000 per beneficiary. However, beginning in April 2024, the FDIC will not insure amounts greater than $1,250,000 per Trust account or cover more than five beneficiaries.
At eLegacy, we work with individuals and families to create Estate Plans that help them manage their estate’s assets not only when they pass away but also during their lifetimes. One tool that we often recommend for managing estates is a Trust. With eLegacy, when you set up a Trust, we do more than just the legal paperwork. We work with our clients to ensure the Trust is properly funded. As part of that effort, we can help our clients select financial institutions that are FDIC insured and ensure their Trust accounts comply with all FDIC regulations to ensure they are protected.
For more information about putting together an Estate Plan or, more specifically, about Trusts, contact eLegacy today.