Special Treatment for Trusts at the FDIC

Question: I am confused by the rules for FDIC insurance.  I thought the limit for coverage was $250,000, but my friend says CDs owned by my trust can be insured for a lot more. Who is correct?

Answer: Thanks for your question. The good news is you are both right, but many people don’t realize that bank deposits made by revocable trusts get special treatment by the FDIC. Let me see if I can clear up some of the confusion.

The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that protects depositors in United States banks. If you deposit money in an insured bank and that bank fails, the FDIC guarantees you get your money back, up to a certain limit. But be careful! Calculating the amount of protection the FDIC provides you and your estate can get a little tricky.

The standard limit for a single account (i.e., an account owned by one person) is $250,000 per depositor, per bank, per type of account.  For example, if a person owns a $250,000 CD in her own name and another $250,000 in the name of her IRA at the same bank, the entire $500,000 is covered by FDIC insurance because they are different account types. However, if a person owns a $250,000 CD in his traditional IRA and another $250,000 in a Roth IRA at the same bank, the FDIC will only insure the combined accounts up to total of $250,000 because the FDIC considers them to be the same account type.  As far as the FDIC is concerned, traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs and self-directed 401k and profit sharing plans are all the same account type.

The FDIC treats revocable trusts very differently, depending on the number of beneficiaries. If you own a CD in your revocable trust and your trust has five or fewer beneficiaries, the FDIC limit is $250,000 for each unique named beneficiary no matter how the beneficial interests are divided among the beneficiaries. Let’s suppose your trust names your three children, your church and your favorite non-profit organization as beneficiaries to your trust. Your trust would have five beneficiaries and, under FDIC rules, your CD would be insured up to $1.25 million ($250,000 x 5). The same rule applies if the CD is held in an informal trust arrangement sometimes referred to as a “payable-on-death” or “P.O.D.” account.

To qualify, a beneficiary must be a living person, or a charity or non-profit organization recognized by the Internal Revenue Service. Beneficiaries must also be named in the trust document or in the deposit account records of the bank. It’s okay if your trust uses common estate planning language such as “my issue” or something similar to specify your beneficiaries, as long as the names and number of eligible beneficiaries can be clearly determined. It is also important that the name on the CD at the bank include the name of your trust.

If there are more than five beneficiaries and the beneficiaries have equal interests under the trust, then calculating the limit remains the same—simply multiply the number of beneficiaries by $250,000 no matter how many beneficiaries there are. However, if there are more than five beneficiaries and they have unequal shares, the calculation gets more complicated. In this case, the limit is equal to the sum of the beneficiaries’ actual interest in the CD up to $250,000 each, or $1,250,000, whichever is greater. See what I mean when I said it can get tricky?


Steven C. MerrellMBA, CFP®, AIF® is an investment advisor and Partner at Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Steve Merrell, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to steve@montereypw.com.