Trusts Can Help Protect from Bank Failure

Q.:  How do I know if the bank insures a trust I set up for my family?

A.: If you walk into almost any savings institution in the United States, you see a little seal on the door that says “Member FDIC.”  The Federal Deposit Insurance Corporation (“FDIC”) was founded in 1933 as a response to the run on banks in the Great Depression.  It provides each person with up to $100,000 of insurance for funds in that bank.  That sounds simple enough.  And, for individuals, it is.  Until recently, however, applying this $100,000 FDIC limit to trusts was more complicated.  For example, the names of the trust beneficiaries had to appear in the bank’s records.  Also, FDIC insurance was not available to a beneficiary whose interest in the trust was conditional or might be removed.

Q.:  What changes now make it easier to apply FDIC insurance to trusts?

A.: Recently, the FDIC amended its regulations to provide that a trust qualifies for $100,000 of insurance for each “qualified” beneficiary of the trust, such as the person setting up the trust, his or her spouse, and his or her children.  So, if you set up a typical revocable living trust and the beneficiaries of this trust are you, your spouse and three children, the trust’s account at an FDIC-member bank would be insured up to $500,000.   Note that some trust beneficiaries may not be “qualified.” For example, domestic partners or friends are not considered “qualified” beneficiaries for purposes of FDIC insurance.  However, in no case would the trust account qualify for less insurance than an individual would.

Q.:  As I understand it, I would be able to get more FDIC insurance coverage for a trust than I would for an individual account.  Still, what is the likelihood that I would ever need to worry about FDIC insurance?

A.: If you use a revocable living trust to hold your assets, you would be insured for up to $100,000 per qualified beneficiary.  Without the trust, the maximum amount of insurance you could get on an individual account would be $100,000. 

Of course, the FDIC insurance is not particularly important until a bank defaults.  It may seem that financial institution defaults are a thing of the past.  However, according to FDIC statistics, there have been FDIC-covered American savings institution failures every year since 1934.  The highest number was in 1989, with 534.  Even since 2000, there have been at least two dozen failures.

Q.:  If FDIC insurance covers my assets, is there any problem with leaving all my assets in one bank?

A.: Even if your account is completely covered by FDIC insurance, it still is wise to diversify your banking assets.  If an institution defaults, access to funds may be suspended, even if they are insured.  Further, no interest would be payable between default and the payout of FDIC insurance.

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information contained herein is general and should not be applied to specific legal problems without first consulting with one of our attorneys.


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