New FDIC Rules Regarding Accounts Held in Trusts

In response to the tumult in the financial sector, the FDIC announced Tuesday interim rules effective on September 26, 2008, regarding the extent of FDIC insurance coverage for bank accounts titled in living trusts.

Many people are unaware that the standard $100,000* coverage limit is generally increased for accounts titled in living trusts. Prior to the issuance of the interim rules announced yesterday, that increased coverage was determined by examining the identity of the trust beneficiaries, and the extent of their interest in the trust. Generally, the $100,000 coverage limit was leveraged so that $100,000 of coverage was extended to each "qualifying beneficiary." This meant that a trust for the benefit of parent during life, and payable to children A, B, C, D and E on parent's death, would receive a total of $500,000 in coverage if each of the children met the definition of "qualifying beneficiary" and if each of them had an equal stake in the trust (assuming the accounts titled in the trust at a particular FDIC-insured institution had an aggregate balance of at least $500,000). Because it was necessary to evaluate whether the beneficiaries were "qualified" (the definition of which is beyond the scope of this blog entry), customers were often unsure how much coverage they had, and processing of claims when institutions failed was often delayed. The new interim rules announced yesterday eliminate the need to evaluate the identity of the beneficiaries, and eliminate the need to confirm the extent of the beneficiaries' stakes in the trust. Therefore, the trust above would still receive $500,000 of coverage because there are five beneficiaries, even if A, B, and C were children receiving 90% of the trust (30% each), and if D and E were non-relatives receiving only 10% each.

Although the rules are still somewhat complex with respect to the evaluation of the amount of coverage when a depositor has multiple accounts at one institution, the interim rules greatly clarify the utility of living trusts in leveraging the depositor's FDIC insurance coverage. The full text of the FDIC announcement can be found at http://www.fdic.gov/regulations/laws/federal/2008/08sep26rule.html.

*Effective October 3, 2008, this figure has been temporarily increased to $250,000 and all figures discussed herein should be adjusted accordingly. The increase in coverage is currently set to expire December 31, 2009.