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FDIC Insurance: Do You Know As Much As You Think You Know?
Misconceptions: A Top 10 List
Misconception Number 8: Revocable trust accounts are always insured up to $100,000 for each beneficiary.
No, not always. A revocable trust account — typically a payable-on-death account or a "living trust" account — is one in which beneficiaries will receive the funds upon the owner's death but the owner (depositor) retains the right to change or revoke the trust. "Although a revocable trust account is insured to the owner, the insurance coverage is based on the interests of the beneficiaries who are entitled to receive the money when the owner dies," explained Nagle.
In general, the owner of revocable trust accounts at a bank is insured up to $100,000 per beneficiary but — and this is important — that is only for "qualifying" beneficiaries under the FDIC's rules. Who qualifies? A depositor's spouse, child, grandchild, parent or sibling, including step-parents, step-children and adopted children. But other relatives, such as nieces, nephews, cousins or in-laws, as well as friends, organizations (including charities) and other entities do not qualify. The portions of the trust payable to any non-qualifying beneficiaries would be insured as the personal funds of the owner up to $100,000 along with any deposit accounts he or she alone has at the same bank.
Our deposit insurance specialists often get calls that go like this: "I've got revocable trust accounts naming five beneficiaries — two nieces, two nephews and a friend. That means I have up to $500,000 in FDIC coverage, right?" The correct answer here is: No — your coverage is $100,000, along with any accounts you own alone (other than retirement accounts) at the bank. That's because nieces, nephews and friends aren't qualifying beneficiaries.
The $100,000 coverage per qualifying beneficiaries presumes equal shares of the trust. If that's not the case, the calculation of coverage becomes more complex. "Consider a father's revocable trust that gives 60 percent to a daughter and 40 percent to a son," said FDIC Senior Consumer Affairs Specialist Martin Becker. "If the trust has $200,000 on deposit at a bank, the daughter's $120,000 share would be insured for $100,000 and the son's $80,000 share would be insured in full, resulting in total coverage of $180,000, not $200,000." For more information, consult the FDIC.
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Last updated on 5/09/2006