In the wake of the collapse of Silicon Valley Bank, many depositors are now beginning to take a second look at their account holdings and designations in order to have piece of mind that their deposits are fully insured by the FDIC.  Some of these depositors are learning for the first time the insured limits of joint accounts as opposed to single accounts, checking versus savings accounts, money market accounts and prepaid cards, employee benefit accounts and corporation, partnership or association accounts.  Least talked about among these categories is the Revocable Trust Account.

Most estate plans, or high net worth individuals seeking to protect their assets, utilize trusts. Trusts can be very useful in limiting tax liability, protecting from creditors, and avoiding the probate process. The best way to describe a trust is simply a property interest held by one person at the request of another. According to Black’s Law Dictionary, a trust is defined as an equitable and enforceable right to the beneficial enjoyment of property to which another person holds the legal title. Trusts are a particularly useful estate planning tool and can provide layered protection for you and your family. They can (i) include restrictions on spending (e.g., Spendthrift trusts); (ii) limit trustee fees; (iii) decrease tax liability by avoiding probate; and (iv) protect the beneficiaries by the utilization of a trustworthy trustee, who is a fiduciary entrusted to monitor the assets, exercise sound judgment, and treat all beneficiaries (income or remainder) fairly and equally.

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). A revocable trust can be revoked, terminated or changed at any time, at the discretion of the owner(s). In this section, the term “owner” means the grantor, settlor, or trustor of the revocable trust. When calculating deposit insurance coverage, the designation of trustees, co-trustees and successor trustees is not relevant. They are administrators and are not considered in calculating deposit insurance coverage.

This ownership category includes both informal and formal revocable trusts:

Informal revocable trusts—often called payable on death, Totten trust, in trust for, or as trustee for accounts—are created when the account owner signs an agreement, usually part of the bank’s signature card, directing the bank to transfer the funds in the account to one or more named beneficiaries upon the owner’s death.

Formal revocable trusts—known as living or family trusts—are written trusts created for estate planning purposes. The owner controls the deposits and other assets in the trust during his or her lifetime. The agreement establishes that the deposits are to be paid to one or more identified beneficiaries upon the owner’s death. The trust generally becomes irrevocable upon the owner’s death.

Coverage and Requirements for Revocable Trust Accounts

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 at the bank must indicate that the account is held pursuant to a trust relationship. This rule can be met by using the terms payable on death (or POD), in trust for (or ITF), as trustee for (or ATF), living trust, family trust, or any similar language, including simply having the word “trust” in the account title. The account title includes information contained in the bank’s electronic deposit account records.

The beneficiaries must be named in either the deposit account records of the bank (for informal revocable trusts) or identified in the formal revocable trust document. For a formal trust agreement, it is acceptable for the trust to use language such as “my issue” or other commonly used legal terms to describe the designated beneficiaries, provided the specific names and number of eligible beneficiaries can be determined.

To qualify as an eligible beneficiary, the beneficiary must be a living person, a charity or a non-profit organization. If a charity or non-profit organization is named as beneficiary, it must qualify as such under Internal Revenue Service (IRS) regulations.

An account must meet all of the above requirements to be insured under the revocable trust ownership category. Typically, if any of the above requirements are not met, the entire amount in the account, or the portion of the account that does not qualify, is added to the owner’s other single accounts, if any, at the same bank and insured up to $250,000. If the trust has multiple co-owners, each owner’s share of the non-qualifying amount would be treated as his or her single ownership account.

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.

Two calculation methods are used to determine insurance coverage of revocable trust accounts: one method is used only when a revocable trust owner has five or fewer unique beneficiaries; the other method is used only when an owner has six or more unique beneficiaries.

If a trust has more than one owner, each owner’s insurance coverage is calculated separately.

Revocable Trust Insurance Coverage – Five or Fewer Unique Beneficiaries

When a revocable trust owner names five or fewer beneficiaries, the owner’s trust deposits are insured up to $250,000 for each unique beneficiary.

This rule applies 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 times 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 $1,250,000.

Revocable Trust Insurance Coverage – Six or More Unique Beneficiaries

Equal Beneficial Interests

When a revocable trust owner names six or more unique beneficiaries, and all 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. As shown below, with one owner and six beneficiaries, with equal beneficial interests, the owner’s maximum insurance coverage is up to $1,500,000.

Unequal Beneficial Interests

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 either: (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 $1,250,000.

Determining insurance coverage of a revocable trust that has six or more unique beneficiaries whose interests are unequal can be complex. For information on coverage beyond the minimum coverage amount of $1,250,000 per owner, please contact the FDIC for assistance.