Will the FDIC Protect My Bank Account?

On average, a handful of banks fail each year (with the exception of financial crisis years such as 2007-2008). You may wonder whether and to what extent the Federal Deposit Insurance Corporation (FDIC) will protect your bank accounts. Fortunately, the FDIC rules define how you can ensure maximum FDIC insurance coverage, and you should consider whether your planning takes advantage of these rules.

FDIC

The FDIC is an independent federal agency that ensures the availability of deposited funds after a bank failure. Created in 1933 after a run on banks left many account owners penniless, the FDIC promotes public confidence and stability in the nation's banking system by protecting your insured deposits in an FDIC-insured financial institution.

Planning tips:

• FDIC-insured institutions include most banks and savings associations located in the United States. It does not include brokerage firms.
• The FDIC covers up to at least $250,000 per depositor.
• FDIC insurance covers the traditional types of bank deposit accounts: checking accounts, savings accounts, money market deposit accounts, certificates of deposit, and certain retirement accounts.
• FDIC insurance does not cover investments in stocks, bonds, mutual funds or money market mutual funds, life insurance policies, or annuities. The FDIC also does not insure US Treasury bills, bonds, or notes, although the US government backs these investments.

Ownership Categories

The standard FDIC deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank. The FDIC ownership categories are listed below and must meet certain requirements to qualify for coverage above $250,000 at one insured bank:

• Single accounts
• Certain retirement accounts
• Joint accounts
• Revocable trust accounts
• Irrevocable trust accounts
• Employee benefit plan accounts
• Corporation/partnership/unincorporated association accounts
• Government accounts

For example, a revocable trust account is a deposit account owned by one or more people that identifies one or more beneficiaries who will receive the deposits upon the death of the owner(s). This ownership category includes both informal revocable trusts (such as payable-on-death (POD) accounts) and formal revocable trusts (living trusts established by a written document for estate planning purposes). In general, the owner of a revocable trust account is insured up to $250,000 for each unique beneficiary if all of the following requirements are met:

• The account title indicates that the account is held pursuant to a trust relationship. Terms such as “payable-on-death,” “POD,” “in trust for,” “ITF,” or “trust” may be used.
• The beneficiaries are named in either the account records of the bank (for informal revocable trusts) or identified in the trust instrument (for formal revocable trusts). For formal revocable trusts, language such as “my issue” or other commonly used legal terms to describe beneficiaries can be used, provided that the specific names and number of eligible beneficiaries can be determined.
• To be eligible for coverage, the beneficiary must be either a living person or a charity or nonprofit organization that qualified as such under the Internal Revenue Service regulations.

Insurance coverage for revocable trust accounts is calculated differently depending on the number of beneficiaries named by the owner, the beneficiaries’ interests, and the amount of the deposit. The following rules apply to the combined interests of all beneficiaries the owner has named in all formal and informal revocable trust accounts at the same bank.

When there are five or fewer beneficiaries, maximum deposit insurance coverage for each trust owner is determined by multiplying $250,000 by the number of unique beneficiaries, regardless of the dollar amount or percentage allotted to each unique beneficiary. Therefore, a revocable trust with one owner and five unique beneficiaries is insured up to $1.25 million.

If you have an account for a joint revocable trust, you and your spouse both have $250,000 FDIC insurance per qualifying beneficiary. In other words, a joint trust with three named beneficiaries will have $1.5 million of FDIC coverage (both spouses have $750,000 of FDIC insurance—$250,000 each for three beneficiaries).

When a revocable trust owner names six or more unique beneficiaries, and all of the beneficiaries have an equal interest in the trust (i.e., every beneficiary receives exactly the same amount), the insurance calculation is the same as for revocable trusts that name five or fewer beneficiaries: The trust owner receives insurance coverage up to $250,000 for each unique beneficiary. An account with one owner and six beneficiaries, with equal beneficial interests, is insured up to $1.5 million.

When a revocable trust owner names six or more beneficiaries and the beneficiaries do not have equal beneficial interests (i.e., they receive different amounts), the owner’s revocable trust deposits are insured for the greater of (1) the sum of each beneficiary’s actual interest in the revocable trust deposits up to $250,000 for each unique beneficiary or (2) a minimum coverage amount of $1.25 million. Determining insurance coverage for a revocable trust that has six or more unique beneficiaries whose interests are unequal can be complex.

You can get detailed information about your specific deposit insurance coverage by accessing the FDIC’s Electronic Deposit Insurance Estimator and entering information about your accounts. You can also call the FDIC at 1-877-ASK-FDIC (1-877-275-3342) and ask to speak to an FDIC deposit insurance specialist.

Worst-Case Scenario

Bank failures at a rate similar to those during the Great Depression are unlikely. However, if there are significant bank failures, the FDIC may not have the liquidity to immediately pay out all FDIC-insured claims. According to the FDIC website (at fdic.gov), the FDIC directly supervises more than 5,000 banks and savings associations. The FDIC insurance fund currently totals over $100 billion.

Conclusion

If your FDIC-insured bank accounts have significant value, they may be covered up to $250,000 per beneficiary, per account type, at each FDIC-insured institution. By discussing your situation with your planning team, including your financial advisor, accountant, and estate planning attorney, you can ensure that you have maximum coverage for all your accounts, including your revocable trust account, in the unlikely event any of your banks fail.