Accounts titled in a trust may be insured by the FDIC for up to $1.25 million, rather than the current $250,000 limit on many individual accounts
I talk to clients a lot about trusts, be it a revocable trust, an irrevocable trust, special needs trust or a special purpose trust.
Almost every funded trust has one or more bank accounts – checking, savings, money market or certificates of deposit – and most of those accounts are insured by the FDIC. What many people do not realize the maximum value covered by FDIC Insurance is calculated differently than that for individual account owners.
This is about to change. The FDIC has issued new regulations effective April 1, 2024, on how much of insured trust accounts are calculated. These changes make it simpler to calculate what is, and is not, insured but will still require some adjustment in how much is or should be placed into a trust(s).
Right now, the FDIC treats revocable and irrevocable trusts differently. Revocable trusts (which includes informal trust accounts such as Pay on Death (POD). With only one beneficiary, the insurance limit is $250,000. If the revocable trust has five or more beneficiaries, the insurance limit is $1,250,000 total; a big difference.
Irrevocable trust accounts are, as a general rule, only insured up to $250,000 for all deposits added together for each beneficiary. To qualify, the irrevocable trust must be: 1) a valid trust under state law; 2) the purpose of the trust is disclosed to the bank; and 3) the amount due to the beneficiary cannon be contingent (i.e. that the beneficiary survives to a certain date). Since most irrevocable trusts have both current and contingent beneficiaries (meaning the beneficiary may or may not receive trust proceeds at any time in the future depending upon events they cannot control), they fail to meet all four of the tests and so are limited to $250,000 aggregate insurance coverage in each FIC insured bank.
The result is that most trust accounts, whether revocable or irrevocable, are limited to $250,000 per FDIC insured bank.
The FDIC Final Regulations Will, As Of April 1, 2024, Change How Bank Accounts Held In The Name Of A Trust Will Be Insured.
This rule change treats both revocable and irrevocable trust the same for determining the limits on insurance. Soon, accounts held by trust may be insured by the FDIC for up to $1,250,000, rather than the $250,000 limit on individual accounts.
Under the new rules, revocable and irrevocable trusts are treated the same – the funds are insured up to $250,000 per beneficiary per FDIC insured bank. The total insured is limited to five beneficiaries, or $1,250,000, but all grantors are also covered up to $250,000. This is a very important part that I’ll back up with a couple of examples of how this works.
Example
I create a revocable trust and provide that, at my death, the trust funds go to my four (4) children, and if one child predecease me, it goes equally to his/her child, my grandchild(ren). I place $750,000 in a bank account in the name of trust I have created. In my example, as the grantor, my interest is insured and my four children are the beneficiaries, the insured amount is $1,250,000 ($250,000 x one (1) grantor x four (4) beneficiaries).
After April 1, 2024, if you have accounts in an FDIC insured bank in the name of a trust, you should review how much is held in each bank and what amounts will be insured for each grantor and beneficiary.
To discuss your NJ trust, please contact Fredrick P. Niemann, Esq. toll-free at (855) 376-5291 or email him at fniemann@hnlawfirm.com. Please ask us about our video conferencing or telephone consultations if you are unable to come to our office.
By Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, NJ Trust Attorney