Important Update: Changes in FDIC Deposit Insurance Coverage
The FDIC deposit insurance rules have undergone a series of changes starting in the fall of 2008. As a result, certain previously published information related to FDIC insurance coverage may not reflect the current rules. For details about the changes, visit Changes in FDIC Deposit Insurance Coverage. For more information about FDIC insurance, go to www.fdic.gov/deposit/deposits/index.html or call toll-free 1-877-ASK-FDIC (1-877-275-3342). For the hearing-impaired, the number is 1-800-925-4618.
Estate Planning and Banking: How to Protect Money for Your Heirs in FDIC-Insured Accounts
Among the many reasons people put significant sums in FDIC-insured deposits is to keep that money
safe — for themselves and for their heirs. While the FDIC doesn't recommend particular financial products or strategies for achieving your estate-planning goals, we can describe different types of deposit accounts that can be used to pass funds on to heirs and explain how to make sure your money is fully insured if your bank fails.
Revocable Trust Accounts
Some of the most popular deposits for estate-planning purposes are "revocable trust accounts." These trusts are called "revocable" because, unlike other types of trust accounts, the depositor has the right to change the terms of the inheritance or cancel the trust agreement entirely. You most likely know these accounts by other names. Here are the two main types:
Payable-on-death (POD) accounts, also referred to as "in-trust-for" accounts, are trust deposits that typically can be set up at a bank with a simple, written declaration in the bank's records that upon the death of the depositor, the named beneficiaries will become the new owners of the money. If properly titled, a traditional certificate of deposit (CD), savings account or even a checking account can be set up as a POD account. Because of their simplicity, the FDIC sometimes refers to PODs as "informal" revocable trust accounts.
"A payable-on-death account is usually established when the owner's estate planning is simple — with the sole objective of leaving a specified amount of cash to a beneficiary," said Martin Becker, an FDIC Senior Deposit Insurance Specialist. "If the owner wants to name multiple beneficiaries on a single POD account, each beneficiary typically receives an equal share or amount of the funds when the account owner dies."
Living trust accounts are deposits tied to a legal document typically called a living trust or a family trust that is often drafted by an attorney. The FDIC describes these accounts as "formal" revocable trust deposits.
"Formal revocable trusts provide more detailed information about how the owner's estate is to be distributed," Becker explained. "For example, formal trust agreements can be used to describe special conditions that need to be met for a beneficiary to receive funds, and in situations in which the allocations to beneficiaries are unequal or complex."
For various reasons, living trusts may not be for everyone. Having a living trust prepared can be expensive, and sometimes the potential benefits may not outweigh the costs, especially depending on your state's inheritance laws and your financial situation. In contrast, "the simplicity of the payable-on-death account makes it the most common type of revocable trust account," said FDIC Supervisory Counsel Joe DiNuzzo. "A POD account has no trust agreement — the only documentation is in the bank records on which the owner designates the beneficiaries."
Also, the Federal Trade Commission (FTC) has warned that some people and businesses have exaggerated or misrepresented the benefits of living trusts, often in advertisements or seminars, to sell trusts or other products to people who don’t need them For additional guidance, see "Living Trust Offers: How to Make Sure They're Trust-worthy."
Under FDIC rules, a depositor's combined interests in all revocable trust accounts at the same bank are insured up to $250,000 for each unique beneficiary named. That means a revocable trust account is insured for up to $250,000 if there is one beneficiary, $500,000 if there are two, and so on up to five different beneficiaries. So if you name five different eligible beneficiaries, your revocable trust account(s) at the same bank will be insured to $1.25 million (five times $250,000), regardless of how much money each beneficiary is to receive. And if two depositors own the account(s), the insured amounts would be doubled, up to $2.5 million.
However, Becker noted that if the depositor is attempting to insure more than $1.25 million and there are six or more different beneficiaries that are to receive different shares, the deposit insurance rules change and understanding the coverage can be more complex. In those situations, he recommends calling toll-free 1-877-ASK-FDIC (1-877-275-3342) to speak with an FDIC deposit insurance specialist.
Also under the rules, almost any named beneficiary — including relatives, friends, charities and nonprofit organizations — will qualify the owner to receive $250,000 deposit insurance coverage for each different beneficiary.
Other Accounts, Other Coverage
Other bank accounts that also can help transfer funds to heirs are:
Jointly owned accounts with no beneficiaries listed. In the most common examples, these would be checking accounts, savings accounts or CDs that two or more people own. Typically, there is a "right of survivorship," so, if one of them dies, the survivor(s) will automatically become the sole owner(s) of the funds.
Under the insurance rules, each person’s share in all joint accounts with no beneficiaries is protected up to $250,000, separately from other accounts at the same institution. So, if a husband and wife have joint accounts at a bank and there are no beneficiaries named, that money is covered up to $500,000. It's also important to remember that the FDIC defines a joint account as being owned by two or more people with no named beneficiaries. Joint accounts are separately insured from accounts that are co-owned but do have beneficiaries, which are considered revocable trust accounts and are insured as described previously.
What happens to the insurance coverage of a joint account if one of the owners dies? The FDIC will continue to insure the joint account as if the deceased co-owner were still alive — for up to six months from the date of death. That means coverage of up to $500,000 if there were two owners. The grace period is intended to give the survivor time, if necessary, to ensure that all of the funds are fully insured by restructuring the accounts or moving some funds to another insured bank.
Irrevocable trust accounts, which are tied to trust agreements that the owner cannot cancel or change. These accounts usually total no more than the basic FDIC insurance limit ($250,000) because of contingencies in the trust agreements. An example might be that children listed as beneficiaries cannot receive any money until they earn a college degree.
Note: You can also have revocable and irrevocable trust accounts at the same bank. The revocable trust accounts would be insured up to $250,000 for each eligible beneficiary, as described previously, and the irrevocable trusts with at least one beneficiary named would be separately insured up to a minimum of $250,000 in total.
Certain retirement accounts, including Individual Retirement Accounts (IRAs), Keogh accounts (for the self-employed) and "401(k)" accounts. Under the FDIC's rules, a person's deposits in certain retirement accounts at the same bank are added together and insured up to a maximum of $250,000 per owner per bank. While beneficiaries often are named for retirement accounts such as IRAs, these accounts — unlike POD and living trust accounts — do not qualify for extra coverage by adding the names of beneficiaries.
Also remember that the FDIC can help you understand your deposit insurance coverage. For more information, visit www.fdic.gov/deposit/deposits or call 1-877-ASK-FDIC (1-877-275-3342) and ask to speak to a deposit insurance specialist.