ESTATE PLANNING WITH FEDERAL DEPOSIT INSURANCE ON BANK ACCOUNTS
Many of my clients wonder how a bank account will be insured by the Federal Deposit Insurance Corporation (FDIC) when they set up these accounts through a will or trust. The FDIC has set forth guidelines to help us understand the rules.
TESTAMENTARY (PAYABLE ON DEATH) ACCOUNTS
What is a testamentary account?
A testamentary account is an account that evidences an intention that the funds shall belong to a named beneficiary upon the death of the owner (grantor or depositor) of the testamentary account. Testamentary accounts are sometimes known as tentative or "Totten" trust accounts, revocable trust accounts or "payable on death" accounts.
How are testamentary accounts insured?
Testamentary accounts make up another legal ownership category and are therefore insured separately from single ownership accounts and joint accounts of the beneficiary or the owner. In order to qualify for this separate insurance coverage, however, a testamentary account must meet the following kinship and record keeping requirements:
a. The named beneficiary must be the owner's spouse, child, or grandchild. Step-children, step-grandchildren, and adopted children and grandchildren are considered qualified beneficiaries of testamentary accounts.
b. The owner's intention that, upon his or her death, the funds shall belong to the named beneficiary must be manifested in the title of the account using commonly accepted terms such as, "in trust for," "as trustee for," or "payable-on-death." These terms may be abbreviated as "ITF," "ATF," or "POD."
c. The beneficiaries must be specifically identified by name in the deposit account records of the depository institution. Each owner meeting these requirements is insured up to $100,000 per beneficiary at each insured institution.
Can a testamentary account have more than $100,000 insurance coverage?
Yes. If a testamentary account is maintained by co-owners, insurance will be determined as if each co-owner maintained a separate testamentary account for each beneficiary. The interests of the co-owners are deemed to be equal unless otherwise stated in the deposit account records. If there are several beneficiaries, their interests are deemed to be equal unless otherwise specified in the deposit account records.
EXAMPLE OF INSURANCE FOR TESTAMENTARY ACCOUNTS
| Amount | Amount | |
| Account Deposited Insured | ||
| Husband in Trust for Wife | $100,000 | $100,000 |
| Wife in Trust for Husband | $100,000 | $100,000 |
| Husband and Wife in Trust for Child One, Child Two, and Child Three | $600,000 | $600,000 |
| Total | $800,000 | $800,000 |
What is the insurance coverage for an account established by a husband and wife in trust for themselves ("husband and wife in trust for husband and wife")?
An account established by a husband and wife solely for their benefit (or for the benefit of one of them) is treated as a joint account, not a testamentary account. Funds deposited in such an account are added to any other joint ownership funds held by the husband or wife.
What is the insurance coverage for a testamentary account where the beneficiary is not the spouse, child, or grandchild of the owner?
If a beneficiary of a testamentary account is not the spouse, child, or grandchild of the owner, the funds attributable to the nonqualifying beneficiary are insured as the owner's single ownership funds. For example, if A establishes a testamentary account for the benefit of his mother (a nonqualifying beneficiary), all of the funds in the account are added to any other single ownership funds owned by A and the sum is insured to a maximum of $100,000. When a testamentary account is maintained by multiple owners or multiple beneficiaries and some beneficiaries qualify for separate insurance coverage but others do not, the funds are first divided between the co-owners, and then again divided between the beneficiaries as to each co-owner. Funds attributable to the nonqualifying beneficiary are then added to any other single ownership funds of each respective owner. Assume, for example, that B establishes a testamentary account for the benefit of her daughter and nephew. Deposit insurance coverage is calculated by first allocating one-half of the funds to the daughter and one-half of the funds to the nephew. The funds allocated to the daughter (a qualifying beneficiary) are then insured separately from B's single ownership accounts or joint accounts. However, the funds allocated to the nephew (a nonqualifying beneficiary) are added to any other single ownership funds owned by B and the sum is insured up to a maximum of $100,000.
Must testamentary accounts be supported by a written trust agreement?
No. If an insured depository institution should fail, however, the owner of the testamentary account may be required to provide proof of the owner's relationship to the beneficiaries.
Does deposit insurance coverage decrease upon the death of one of the co-owners of a testamentary account?
Yes. Each co-owner is entitled to insurance coverage as to each beneficiary only during the co-owner's lifetime. Upon the death of any one of the co-owners, insurance coverage decreases.
REVOCABLE LIVING TRUSTS
What is a revocable living trust?
A trust is a means by which an individual transfers legal ownership of funds to a trustee with the intention that the funds will be used by the trustee for the benefit of a designated person. A revocable living trust is one in which the grantor of the trust reserves the right to revoke the trust. A revocable living trust is established through a written trust document.
How is a revocable living trust insured?
Revocable living trust funds are insured as the individual funds of the grantor unless they meet the special requirements for separate coverage of testamentary accounts. This means that funds deposited under the provisions of a revocable living trust will be added to any other single ownership funds of the grantor and the total will be insured up to a maximum of $100,000. If a revocable living trust has been created by more than one grantor, funds deposited pursuant to the trust will be treated as the individually owned funds of each such grantor. Thus, the trust funds will be divided between the grantors, added to any other single ownership funds of each such grantor, and the sum will be insured up to $100,000 per owner. Under certain circumstances, however, the trust funds are insured as the jointly-owned funds of the grantors.
Can funds deposited pursuant to a revocable living trust document ever be insured separately from the individually owned funds of the grantor(s)?
Funds deposited pursuant to a revocable living trust may be separately insured from the grantor's individually owned funds if the revocable living trust document and the deposit account records satisfy the requirements applicable to testamentary accounts. In this situation, the grantor would be insured up to $100,000 as to each qualifying beneficiary. The requirements are as follows:
a. The trust document must provide that the funds shall belong to the named beneficiary upon the death of the grantor. Revocable living trust documents often fail to satisfy this requirement because they usually contain provisions that may prevent the beneficiary from receiving all of the deposited trust funds upon the death of the grantor. However, you must weigh the risk of full distribution to a young person (someone under the age of 25) against the risk of loss because the funds are not fully FDIC insured. Having an immediate payout to a young person will often guarantee that the funds will be spent (or wasted) quickly on things that are not in the best interest of that person. Having an age of distribution provision in a living trust ensures that this will not happen where the then acting trustee controls the distribution in the best interest of that beneficiary. The risk of loss from a lack of FDIC insurance is infinitely smaller than the risk of misspending.
b. The named beneficiary must be the spouse, child, or grandchild of the grantor. Funds deposited pursuant to a revocable living trust established by a husband and wife solely for their benefit (or for the benefit of one of them) are treated as joint ownership funds. Such funds are added to any other joint ownership funds held by the husband or wife.
c. The grantor's intention that, upon his or her death, the funds shall belong to the named beneficiary must be manifested in the title of the account. This may be accomplished by depositing the funds in the name of the trust.
d. Each beneficiary must be specifically named in the deposit account records of the depository institution. It is not sufficient to designate a class of beneficiaries, such as "grandchildren" .
If the revocable living trust document and supporting deposit account records fail to satisfy any of the above requirements, funds deposited pursuant to the revocable living trust will be insured as the single ownership funds of the grantor(s) or in some cases as the jointly-owned funds of the grantors.
IRREVOCABLE TRUSTS
How are irrevocable trust funds insured?
Irrevocable trusts constitute another legal ownership category. The interest of each beneficiary in an account established under an irrevocable trust is insured to $100,000, separately from other accounts held by the grantor, trustee, or beneficiary, if the following requirements are met:
a. The deposit account records of the depository institution must disclose the existence of the trust relationship.
b. The interests of the beneficiaries must be ascertainable from the deposit account records of the depository institution or from the records of the trustee maintained in good faith and in the regular course of business.
c. The value of each beneficiary's interest must be capable of determination in accordance with FDIC Regulations.
d. The trust must be valid under State law.
Kinship is not a factor in determining coverage of irrevocable trusts. In cases where the beneficiary has an ownership interest in more than one trust created by the same grantor, the interests of the beneficiary in all accounts established under whose trusts are added together and the sum is insured to a maximum of $100,000.
What if the beneficiaries or their interests in such a trust cannot be ascertained?
When the identity or quantifiable ownership interests of the beneficiaries cannot be determined, insurance coverage for the entire trust is limited to a maximum of $100,000.
David J. Bernstein is an Attorney in practice since 1983, concentrating on estate and tax planning. The primary focus of his practice is the preparation of Living Trust Arrangements and Nursing Home Estate Planning. He received his bachelors degree in Accounting from Kent State University and his Juris Doctor of Law degree from the University of Akron. He is a frequent lecturer on Living Trust Arrangements. For a free copy of his one hour video taped seminar on Living Trust Arrangements, call David J. Bernstein at 440-349-4889.
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