FDIC Insurance for Trust Accounts

old bankMost people know that the FDIC (Federal Deposit Insurance Corporation) insures bank accounts for up to $250,000 per depositor per covered bank. This insurance was increased from $100,000 to $250,000 in 2008, to reassure people during the chaos of the financial meltdown that started in that year. (This increase was supposed to be temporary, but was made permanent in 2010, as part of the Dodd-Frank Act).

So, if, for example, you are the sole owner of a bank account with $500,000 in it, that account is only insured for $250,000.  If that same bank account is co-owned by your spouse, that account is insured for $500,000 because each owner gets that $250,000 of insurance. For many of us, that’s enough insurance. But not always. I’ve had clients call me after they’ve sold a house, nervous about the fact that they have a large balance on deposit at the bank. What to do?

A living trust can help here. While it is true that everyday bank accounts that don’t accumulate much money (the ones you use to pay bills) are usually not put into a living trust, larger accounts are.  There are two reasons for this: first, large accounts should be held in trust to avoid probate at the owner’s death; second, holding a bank account in the name of a trust means additional FDIC insurance on that account.

That’s because the FDIC insures accounts held in a revocable living trust for more than an account that’s individually owned. Here’s how it works: the FDIC will insure a trust account for up to $250,000 per beneficiary, per account owner. So, if a husband and wife are the settlors of a living trust, and that trust has 3 beneficiaries (their children, John, Ron, and Connie), their bank account, if held in the trust,  will be insured for up to $1.5 million: 3 beneficiaries x $250,000=$750,00 x 2 account holders=$1.5 million. To learn more about how the FDIC calculates insurance on trust accounts, their website offers helpful information and examples.

The FDIC also offers a handy tool, called “EDIE the estimator” that you can use to find out how your accounts at each FDIC insured bank will be insured. If you have bank accounts that hold large balances, use it to see how your accounts are currently insured. If you don’t like your options, consider putting your accounts into a trust.