What the New FDIC Limits on Trusts Mean for Advisors

A new deposit insurance rule effective April 1 has capped what the Federal Deposit Insurance Corp. will insure in a trust account at $1.25 million.

The new rule “limits the number of trust beneficiaries for both revocable and irrevocable trusts that receive the $250,000 insurance amount to five, totaling at most $1.25 million for a single-owner trust,” according to Ron Rhoades, associate professor of finance at Western Kentucky University and director of its personal financial planning program.

The new rule “also applies to informal trust accounts, also known as POD (‘pay-on-death’) accounts and ITF (‘in trust for’) or ‘Totten Trust’ accounts,” Rhoades explained.

Rhoades told ThinkAdvisor via a recent email exchange what the new rules mean for advisors.

THINKADVISOR: How has the FDIC changed the limits for trusts?

RON RHOADES: Under the new rule, each trust owner will be insured for up to $250,000 per eligible primary beneficiary, up to a maximum of five beneficiaries. An “eligible” beneficiary can be any living person or an IRS-recognized charity or IRS-recognized non-profit. Only primary (not contingent) beneficiaries count.

For example, a revocable living trust has one owner. The lifetime beneficiary of the trust is the owner, who is entitled to receive income and principal distributions during the owner’s life from the trust as the owner requests (and also, during a period of incapacity, for his or her support needs). The owner’s spouse is the sole beneficiary of the trust upon the owner’s demise. Under this scenario, the insurance limit is (1 trust owner x 2 eligible beneficiaries x $250,000 =) $500,000.

For a joint revocable trust with two owners, which provides for support during the owners’ lifetimes for both owners and, upon both owners’ end-of-lifetimes, provides for the owners’ two children, the insurance limit is (2 trust owners x 4 eligible beneficiaries x $250,000 =) $2,000,000.

In this instance, the two owners are life estate beneficiaries — those who have the right to receive income to use trust deposits during the beneficiary’s lifetime. The two children are remainder beneficiaries. Both lifetime and remainder beneficiaries are eligible beneficiaries, even though the joint trust is revocable.