Calculating and Maximizing Deposit Insurance for Revocable Trust Bank Accounts

Prompted by the recent takeover of Silicon Valley Bank, the Federal Deposit Insurance Corporation (“FDIC”) has published guidance regarding the calculation of insured funds at a particular insured depository institution (“IDI”). The following is intended to summarize the portion of the FDIC’s guidance as it pertains to bank accounts held by a revocable trust.

In order for a revocable trust account to be insurable as a revocable trust account, it must satisfy certain basic requirements. First, the account must be properly titled to reflect a trust relationship, specifically, the title must be in the name of the trust itself or have “trust” in the name. Second, the beneficiaries must be identified. They need not be specifically identified, so long as the group they are identified as is sufficiently specific to determine identity and interest (i.e., “my children”; “my issue”). Proper identification is not usually an issue for formal trust accounts as the beneficiaries are articulated in the trust agreement. As to the beneficiaries themselves, only beneficiaries that are either a natural person, a charitable organization, or a non-profit entity are considered “eligible” for inclusion in the calculation of the maximum insurable amount of the aggregate accounts. All other beneficiaries are deemed ineligible. Funds attributed to ineligible beneficiaries that may still legally receive a bequest under state law (most usually for-profit business entities) are reverted to the single account of the grantor. Ineligible beneficiaries that are not able to receive a bequest under state law (for example, pets in some states) are deemed invalid beneficiaries and are ignored, allocating whatever funds attributable to them as a beneficiary to other trust beneficiaries. Of course, if there are no other eligible beneficiaries, these funds will once again revert to the single account of the grantor. Funds attributable to the single account of the grantor receive $250,000 of deposit insurance, across all single-owned accounts owned by the grantor.

Not only must beneficiaries be eligible, they must also be primary beneficiaries. This means they cannot have an alternative or contingent interest. However, if a beneficiary predeceases the grantor, they will not be counted in insurance calculation unless there are beneficiaries in place to receive their interest, in which case all beneficiaries entitled to the interest of the predeceased beneficiary will be counted as primary beneficiaries. This is commonly seen in trusts that provide for distributions to children of the grantor and their children’s issue, should the child predecease the grantor. In that case, if the child is living at the time of the IDI’s collapse, the child would be a primary beneficiary. If the child predeceases the grantor when the IDI collapses and the provisions of the trust allow for the predeceased child’s issue to step into their place as primary beneficiaries, only then will the grandchildren be counted for insurance coverage purposes. Another common occurrence in formal revocable trusts is for one beneficiary to be granted a life estate, or an interest in the trust for the life of the grantor, and upon the grantor’s death, the remainder interest granted to a different beneficiary. For deposit insurance purposes, both the life estate beneficiary and the remainder interest beneficiary are considered primary beneficiaries.

Calculation of coverage itself varies slightly for revocable trust accounts with 5 or fewer unique primary beneficiaries and revocable trust accounts with 6 or more unique primary beneficiaries and more than $1,250,000 held in the aggregate accounts. The math for 5 or fewer unique primary beneficiaries is as simple as: {number of account owners} multiplied by {number of unique primary beneficiaries} multiplied by $250,000. This maxes the insured amount at $1,250,000 per account owner. Trust accounts with 6 or more beneficiaries and less than $1,250,000 are fully insured.

Aggregate trust accounts with 6 or more beneficiaries and more than $1,250,000 are calculated one of two ways, depending on the beneficial interests involved. Where the beneficiaries all have equal interests, the insurance coverage is calculated the same as trust accounts with 5 or fewer beneficiaries: {number of account owners} x {number of unique primary beneficiaries} x $250,000.

The maximum insured amount of trust accounts with 6 or more beneficiaries with unequal interests is calculated by first determining the largest percentage amount allocated to any one beneficiary under the terms of the trust. This is not a calculation of the allocation of the aggregated accounts, but rather the allocation of the trust’s total assets. This percentage is then divided by $250,000. If the number produced is higher than $1,250,000, that will be the maximum amount insured for the aggregate accounts. If the amount produced is lower, the account will be insured for $1,250,000. For example, a formal revocable trust with one owner which allocates 15% each to three then-living children and 11% each to 5 then-living grandchildren. The product of $250,000 divided by .15 (the highest percentage allocated) is $1,666,667, so $1,666,667 will be the maximum insured amount because it is greater than $1,250,000. Generally, if the highest percent allocation under the trust’s terms is 20% or higher, the maximum insured amount will be $1,250,000.

Bank accounts held by revocable trusts are considered “formal” revocable trust accounts. When calculating deposit insurance, all revocable trust accounts at a particular IDI, both formal and informal, and the beneficiaries of those accounts are taken together. “Informal” revocable trusts are accounts that are payable on death (“POD”), in trust for (“ITF”), as trustee for (“ATF”), or Totten trust accounts. One of these phrases or acronyms is required to be in the title of the account to be considered “properly titled.” If a formal revocable trust is a beneficiary of an informal trust account, the FDIC will incorporate the beneficiaries of the formal trust into their deposit insurance calculations of those funds if the accountholder of the informal trust account wholly owns the formal revocable trust. In the case of a family trust with two grantors, accounts owned by only one grantor will not be considered “wholly owned” and the interest attributable to the formal trust will be reverted to the accountholder single-owned account for insurance calculation. For beneficiaries of informal trust accounts that are not formal trust accounts wholly owned by the grantor, the FDIC will only consider beneficiaries that are identified in the IDI’s account records. Aside from those nuances in formalistic insurability requirements, formal and informal trust accounts are insured according to the same regulations.

Some additional items to consider are that upon the death of an account owner, there is a 6-month grace period in which insurance coverage will be calculated as though they are still living. Coverage for accounts with multiple owners, once the 6 months has passed, will be calculated with one owner. If the account had only the one owner, the account will become irrevocable and will receive $250,000 insurance coverage total, regardless of the number of unique primary beneficiaries. Additionally, all accounts at a particular IDI are taken together and calculated based on unique primary beneficiaries between the lot of them. Merely opening another account with the same beneficiaries at the same institution will not increase insurability. If you wish to maximize the amount insured, should banks continue to collapse in the upcoming days, months, or years, the best way is to spread the love around and add unique primary beneficiaries to your formal revocable trust and/or your informal revocable trust accounts.

The full FDIC article on deposit insurance for revocable trust accounts is linked here for your convenience and reading pleasure.