How to Increase FDIC Coverage 5-Times with a Family Trust

For those having bank accounts with balances of more than $250,000, a perennial challenge is keeping the funds federally insured under the FDIC program (or the equivalent NCUA program for credit union accounts).

Both the FDIC and the NCUA programs routinely cover accounts with up to $250,000 in them. Since both programs operate under the same principles, I’ll refer to those programs for the rest of this article simply as the “FDIC programs.”

Traditionally, people with more than $250,000 being stored as cash funds have been reduced to opening accounts at multiple institutions in order to keep all their funds federally insured. Furthermore, as recent developments with the failure of Silicon Valley Bank have shown, a surprising number of account holders maintain much larger balances and simply cross their fingers hoping their bank will be able to return the funds when they decide to close the account. But as has sometimes been noted, “Hope is not a strategy.”

As a result of the recent bank failures, some people have chosen to move larger accounts to banks that are generally regarded as “too big to fail.” But two drawbacks to this approach exist: (1) There’s no guarantee that the Fed, the Treasury, or the FDIC will actually step in to protect the oversized accounts, even at those banks; and (2) Many of us enjoy and prefer dealing with local banks and their familiar personnel.

For those of you facing this quandary, accounts held in the name of a Living Trust or Family Trust may be just the ticket. Accounts held in the name of a Trust receive special treatment under the FDIC program. The amount of FDIC coverage can be increased up to five-fold.

Here’s the essence of the rules:

• For accounts held in the name of a Trust created by an unmarried person, up to $1,250,000 can be protected. For such a Trust, the FDIC will protect $250,000 of fund for each person or IRS-recognized charitable entity named as a beneficiary under the Trust (up to a maximum of five beneficiaries).
• For a Trust created by a married couple, the amount of the FDIC protection is $500,000 per beneficiary, up to a maximum of five beneficiaries, for total protection of up to $2,500,000.

So, who are the “eligible beneficiaries” of your Trust? They are simply the people and IRS-recognized charities who will receive the remaining assets in your trust after you away. Most of the time that will include your children or other family members. But it can also include your friends and even charitable entities who are named as beneficiaries in your Trust.

This approach opens the door for those who have set up a Trust to jump the amount of their FDIC coverage dramatically.

Here are a couple of examples showing how this can work:

Example 1: An unmarried man creates a Family Trust. He has named his two children plus three of his favorite charities to receive the remaining trust property in uneven shares when he passes away. When he creates a new account at his local bank or credit union, the amount of his FDIC/NCUA insurance will protect his account balance up to a maximum of $1.25 Million. That is the result of having a total of five beneficiaries multiplied by $250,000 each.

Example 2: A married couple has a Family Trust. They have named two charities to be the recipients of small gifts. Then they’ve left the remainder of their property and possessions to be divided evenly between their three children. This results in a total of 5 eligible beneficiaries (3 children + 2 charities). With those being the terms of the trust, at each bank or credit union at which the trust opens an account, those accounts will be FDIC-insured for up to $2,500,000. In fact, they can have as many such accounts at different banks and credit unions as they wish and each one will be fully insured so long as the total sum of all account balances at any given bank or credit union does not exceed $2.5 Million. Nothing further is required to receive this coverage.

A few details of these rules are worth noting:

• The account coverage does not depend on the magnitude of the individual gifts under the Trust. Even if a charity or a child will only receive $100, the amount of the federal insurance on the account increases by $250,000.
• If there are less than 5 eligible beneficiaries for the Trust, the amount of the FDIC coverage for each account will simply be $250,000 times the actual number of those beneficiaries for a single person’s Trust, or $500,000 times the actual number of beneficiaries for the married couple’s Trust.
• The balances of multiple accounts held at the same institution (or at multiple branches of the same institution) will be added together for this calculation. So, opening accounts at multiple branches of the same bank or credit union will not increase the coverage. The accounts must be held at different institutions.
• To take advantage of this bonus coverage, it is imperative that each such account be held in the name of the Trust, not just in the names of the people who set up the trust. Your bank or credit union “new accounts” officer can help make sure the Trust’s title on the account is held correctly.
• On top of these limits, it is also possible to insure an additional $250,000 in accounts in the holder’s individual name (rather than the Trust name) at the same bank or credit union. But doing so may defeat the benefit of avoiding probate under the Trust unless all of the Trust beneficiaries are also named as the “Payable on Death” beneficiaries of that non-Trust account.

Bearing this in mind, what is the best course of action? A couple of conclusions make sense:

For those who already have a Family Trust, do the math to see if your current (and prospective) account balances are completely covered. Add up the total number of beneficiaries who will receive part of your estate when you pass away and multiply that number time $250,000 (if you are not married) or $500,000 (if you are married). That will tell you the maximum account balance that is currently protected by the FDIC. Then compare that total to the current or anticipated balance in your largest account. If you don’t have (and don’t foresee having) an account with more than that amount of money in it, then you should be in great shape. If you have, or anticipate having, an account with a larger account balance, consider amending your Trust to add charities as additional beneficiaries in order to increase your coverage. The magnitude of the gifts to the charities does not matter. The bonus coverage is automatic. You shouldn’t have to do anything further, other than naming at least five total beneficiaries, to take advantage of the program.

For those who do not currently have a Family Trust, setting one up may be an excellent idea. Not only does it greatly expand your FDIC protection, it has the added benefit of protecting your family and heirs from having to go through the probate process when you pass away. Then, once you have the new Trust established, make sure all of your bank accounts are in the name of your new Trust, not just in your individual names as is currently the case. And be sure that, between children, other heirs, and your charities, your Trust names at least five beneficiaries altogether.

This article distills down a complex and lengthy set of guidelines and rules to a manageable summation. We consequently recommend that each person setting up a Trust account with more than $250,000 in it for a single person or $500,000 for a married couple ask the bank or credit union to confirm the magnitude of their FDIC of NCUA coverage under the terms of their Trust.

Additional FDIC Source of Info: fdic.gov/deposit/diguidebankers/documents/revocable.pdf

(Note, in the linked article, comments regarding “ Formal Revocable Trusts” are the ones that govern FDIC coverage for Living Trusts or Family Trusts. References to “Informal Revocable Trust Accounts” refer to a different type of account.)