New FDIC Insurance Coverage and the Revocable Living Trust: To What Extent Are Your Bank Deposits Protected?

In October of 2008, the Federal Deposit Insurance Corporation (FDIC) raised the deposit insurance coverage provided by at qualifying banks from $100,000.00 to $250,000.00 per depositor. This increase in coverage is temporary and will expire in December 29, 2009 at which time the limit will return to the $100,000 amount. However, the increase will be permanent as to some retirement accounts.

FDIC is the insurance that protects your deposits in any given bank, up to the coverage amount in the event your bank fails.

The $250,000 limit applies separately to certain types of accounts held at the same institution.

  1. The sums of all accounts an individual owns at a bank that are in that individual’s name alone are insured up to the $250,000 limit.
  2. Joint owners of accounts are insured up to $250,000 for each joint owner.
  3. The aggregate of certain types of retirement accounts and IRAs are insured up to $250,000.
  4. The $250,000 coverage for revocable living trusts (RLT) is applied to each beneficiary.
Scenario Coverage
An account or accounts in Husband’s name alone $   250,000
An account or accounts in Wife’s name alone $   250,000
An account or accounts Husband and Wife own jointly $   500,000
An account or accounts owned by Husband and Wife’s RLT $1,000,000
Total $2,000,000

As you can see, coverage is increased and exposure to loss is diminished when deposits are spread over the different categories of coverage and the above example does not take into consideration IRA or retirement account insurance coverage.

Calculating the Revocable Living Trust FDIC Coverage*

FDIC coverage for Revocable Living Trusts is $250,000 per beneficiary. To determine the amount of coverage as to the Revocable Living Trust account, you will take the number of grantors multiplied by the number of beneficiaries and multiply that amount by the $250,000 coverage limit.

For a Revocable Living Trust with two joint Grantors (Husband and Wife) naming three beneficiaries (children), the coverage would be calculated as follows:

Joint Trust – Husband and Wife are Owners and neither is considered a beneficiary. There are three children beneficiaries. Owners times beneficiaries: Two owners times 3 beneficiaries times $250,000 is $1.5 million in insurance.

If the Husband and Wife have separate trusts, each one would become the beneficiary of the other’s trust so the calculation would be a little different.

Separate Trusts – Husband and Wife are Owner’s of each of the prospective trusts and not considered a beneficiary of their own trust. However, with separate trusts, each spouse becomes a beneficiary of the other’s trust. And we still have the three children beneficiaries of both trusts: Owner times beneficiaries (4) times $250,000 is $1 million in insurance.  This is the coverage for each separate trust, for total coverage of $2 million.

Under the old law, a beneficiary of a Revocable Living Trust had to be a ‘qualifying’ beneficiary wherein a relationship must have existed between the owner and the beneficiary such as spouse, children, parents, grandparents, brothers or sisters.

Now a beneficiary qualifies as long the beneficiary is either an individual or a non-profit organization such as a charity.

*Where each account owner with combined revocable trust deposit balances of more than $1.25 million and more than five named beneficiaries, coverage is the greater of $1.25 million or the aggregate of all beneficiaries’ proportional interests in the trust deposits, limited to $250,000 per beneficiary.

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