As an estate planning attorney, one of our primary goals is to help clients protect and preserve their wealth for future generations. Trusts are powerful tools in this regard, offering a range of benefits from probate avoidance to tax optimization. However, when it comes to funding your trust with cash assets, it’s crucial to understand how FDIC deposit insurance applies.
Many people assume that FDIC coverage is straightforward – you’re insured up to $250,000 per account, right? Well, not exactly. When trusts are involved, the rules get more complex. But with a little strategic planning, you can actually leverage those rules to secure far more robust coverage for your trust funds. In this article, we’ll break down the key concepts and show you how to maximize your FDIC insurance when using trusts.
The standard FDIC coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Most people are familiar with this as it applies to individual and joint accounts. But what about trusts?
Here’s the key: for deposits owned by a trust, the FDIC provides $250,000 in coverage for each unique beneficiary designated by the trust. This is a separate category of coverage from individual and joint accounts. And it applies to both revocable and irrevocable trusts, with a few specific exceptions we’ll touch on later.
So let’s say you have a living trust with three named beneficiaries. You could put up to $750,000 in a single trust account at one bank, and it would be fully insured by the FDIC ($250k per beneficiary). If you have five or more beneficiaries, you can insure up to $1,250,000 per trust owner, per institution. That’s a lot of coverage!
The trick is understanding what qualifies as a “unique beneficiary” in the eyes of the FDIC and structuring your trust deposits accordingly. We’ll dive into those details shortly. But first, let’s clarify which types of trusts are eligible for this expanded coverage.
Most common estate planning trusts will qualify for the per-beneficiary coverage, including:
The key point is that both revocable and irrevocable trusts can qualify for the expanded coverage. It’s a common misconception that irrevocable trusts are limited to $250,000 in total coverage, like a business account. In reality, with proper structuring, even an irrevocable trust can secure millions in FDIC insurance.
Let’s take a closer look at how the FDIC determines coverage limits for trust accounts. For a trust with a single grantor (the person who creates and funds the trust), you simply multiply $250,000 by the number of unique eligible beneficiaries.
To be eligible, a beneficiary must be a living person, charity, or non-profit organization (12 C.F.R. § 330.10(c)). Contingent beneficiaries are not counted for coverage purposes if the primary beneficiary is still living (12 C.F.R. § 330.10(f)). And if a beneficiary has both a life estate and a remainder interest, they only count once.
Here are a few examples:
Scenario 1:
Scenario 2:
Scenario 3:
As you can see, the per-beneficiary coverage can really add up, especially if you have a large family or include charities in your trust.
What if your trust has more than one grantor, like a married couple? In that case, each grantor’s share of the trust assets is insured separately according to their beneficiary designations (12 C.F.R. § 330.10(h)).
For example, let’s say a husband and wife establish a joint living trust with $2 million in bank deposits. They name their three children as equal beneficiaries. In this scenario, the FDIC would insure the trust as follows:
By planning ahead and spreading their trust funds across three beneficiaries, this couple can protect 75% of their deposits. And if they divided the same $2 million across five beneficiaries (like their children and two charities), it would be 100% insured.
There are a few common misunderstandings about how FDIC coverage applies to trusts that are worth clarifying:
The key takeaway is that FDIC coverage for trusts hinges on two main factors: the number of grantors and the number of unique eligible beneficiaries. The other details of your trust agreement, while certainly important for other reasons, generally do not impact your deposit insurance.
Now that you understand the rules, here are a few strategies our firm recommends to maximize your FDIC coverage when funding a trust:
By implementing these strategies, you can protect significant sums of money held in trust, often far more than the standard $250,000 limit. The key is understanding the rules and proactively structuring your trust accounts to maximize coverage.
FDIC deposit insurance is a critical tool for safeguarding your wealth, but the rules can be complex, especially when it comes to trusts. By understanding how coverage applies to different types of trusts and beneficiaries, you can help you dramatically increase your insured deposits.
At Johnson Legal, we focus on creating comprehensive trust-based plans that maximize asset protection while minimizing risk. If you’d like to learn more about how we can help you leverage FDIC coverage and other wealth preservation strategies, we invite you to contact our office for a consultation. Together, we can ensure that your hard-earned assets are safe, secure, and ready to benefit the people and causes you care about most.
Shane T. Johnson is the CEO and Managing Partner of Johnson Legal, an estate planning and business law firm in Wilmington, NC. With years of experience in estate and business law, he has zealously represented clients in various legal matters, including small business formation and purchasing, estate planning, probate, domestic violence, and other legal cases.
Shane received his Juris Doctor from the University of Wyoming and is a member of the North Carolina Bar Association. He has received numerous accolades for her work, including being named among the Best Probate Lawyers in Wilmington by Expertise.com.
