When I first started practicing law, one would be hard pressed to believe that a bank would fail. It’s been a long time since the failures of the Great Depression that led to the creation of the FDIC (Federal Deposit Insurance Corporation) and with each passing generation the memory and fear of banks going belly up and losing your money has largely subsided and given way to an overly comfortable denial.
That said, in the past year we have seen a scary resurgence in bank failures even fiercer and quicker than those in the 1930s (thanks to online access to accounts). As a result, many of our clients are rightfully concerned about how truly protected their money is at their banks and they have been asking us more and more about FDIC coverage, how it works, and best practices to maximize its protection so they can sleep easy knowing their money is truly safe at their bank.
Normally the FDIC will only insure up to $250,000 of your money at any one bank. It’s a common misconception that the coverage is $250,000 per account, but it is actually $250,000 per bank. So you can have multiple accounts at one bank, and as long as the aggregate is not above $250,000 then the FDIC will cover any loss as a result of a bank collapse. However, once that amount exceeds $250,000, you will need to open bank accounts across more than one bank to expand your FDIC coverage.
However, another way to expand FDIC coverage that is fairly convenient is to open a bank account in the name of your revocable trust. In general, the FDIC will cover $250,000 for the trust owner and an additional $250,000 for each primary beneficiary of the trust for a maximum of $1,250,000 that the FDIC will fully cover at any one bank.
When the number of beneficiaries is five or fewer, the calculation of coverage is simple: the number of owners multiplied by the number of beneficiaries multiplied by $250,000. If the product is greater than the aggregate balance of the accounts, the funds will be fully insured. If the product is less than the aggregate balance of the accounts, the excess will be uninsured.
When the number of beneficiaries is greater than five, and the aggregate balance of the accounts exceeds five times $250,000 (i.e., $1,250,000), the calculation of coverage is more complicated. First, in accordance with the terms of the trust agreement, the funds are allocated to the various beneficiaries. Second, the insurance limit (the SMDIA) is applied separately to each beneficiary’s interest. To the extent that any beneficiary’s interest exceeds the SMDIA, the excess will be uninsured. At a minimum, however, the accounts (with more than five beneficiaries) will be fully insured up to five times $250,000 (i.e., $1,250,000).
I hope this brief explanation of how to use revocable trusts to expand your FDIC coverage was helpful and useful for you. Should you have any other questions, please do not hesitate to reach back out.
