The federal government provides protection for certain types of accounts in banks and credit unions. If a bank or credit union fails or is unable to pay its depositors, the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Share Insurance Fund (NCUSIF) guarantee payment.
Although the information comes directly from the FDIC and NCUA, it is not the actual law. As with any government agency, even if they are wrong in what they publish, you are still subject to the actual law. Caution is always recommended.
FDIC
The following information was taken directly from
www.fdic.gov
Revocable Trust Accounts
What is a revocable trust account?
A revocable trust account is a deposit account that indicates an intention that the funds will belong to one or more named beneficiaries upon the death of the owner (grantor/settlor). There are both informal and formal revocable trusts.
What is a formal revocable trust (Living or Family Trust Account)?
Formal revocable trusts - known as "living" or "family" trusts - are written trusts created for estate planning purposes. The owner (also known as a trustor, grantor or settlor) controls the funds in the trust during his or her lifetime and reserves the right to revoke the trust.
How are funds deposited pursuant to a revocable living trust document insured?
Funds deposited pursuant to a revocable living trust may be insured up to $100,000 for each qualifying beneficiary if the revocable living trust document and the deposit account records satisfy the following requirements:
The trust must provide that the funds will belong to the named beneficiary upon the grantor's death.
The account title must disclose the existence of the trust.
The named beneficiary (ies) must be qualifying (see question "Who are qualifying beneficiaries).
What happens if a revocable trust fails to satisfy any of the above requirements?
If the revocable living trust fails to satisfy any of the above requirements, funds deposited pursuant to the revocable living trust will be insured as the single account funds of the owner. If the trust is jointly owned, the funds would be split between the owners, but still insured as their single account funds.
What is the difference between a successor trustee and a beneficiary?
A trustee is an administrator appointed by the trust owner to execute the terms of the trust. A beneficiary is an individual who will be entitled to the trust assets upon the death of the trust owner. A beneficiary may also be a trustee. Please note that for the purpose of calculating deposit insurance coverage only, the trustees, co-trustees or successor trustees are not relevant.
What happens to deposit insurance coverage when one of the joint grantors of a revocable living trust dies?
As always, we must look to the provisions of the trust before we can determine coverage. In general, if an owner of a revocable living trust dies, deposit insurance coverage will be reduced. Take the example of a revocable trust account with two owners -- a husband and wife -- that name the couple's three living children as equal beneficiaries. When both owners are alive, this account would be insured up to $600,000, since each owner insured up to $100,000 for each qualifying beneficiary. When one owner dies, the provisions of the trust state that the funds are divided between two trusts: an irrevocable trust and a revocable trust. For details on the insurance coverage of an irrevocable trust, see the next section. The revocable trust will be insured based on specific provisions of the trust as discussed in an earlier question. (Note: The FDIC insures a deceased person's accounts as if they were still alive for another six months. During this grace period, the insurance coverage of the owner's accounts will not change unless the accounts are restructured by those authorized to do so. Also, the FDIC will not apply this grace period if it would result in less coverage).
How does the death of a beneficiary of a living trust (formal revocable trust) affect the insurance coverage?
Like informal revocable trusts, the six-month grace period does not apply to the death of a beneficiary named in a formal revocable trust account. Unlike informal revocable trusts, the terms of the formal revocable trust may provide for a successor beneficiary or some other redistribution of the trust funds. Depending on these terms, the insurance coverage may or may not change. For more information, contact the FDIC using one of the resources listed under the For More Information from the FDIC section of the "Your Insured Deposits" brochure.
When opening a living trust account, should the account title include the names of the account owners only or should it also include the names of the trustees?
In accordance with FDIC regulations, the account title at the bank must indicate that the account is held pursuant to a formal trust. This rule can be met by using the terms "living trust," "family trust," "revocable trust", "trust" in the account title. As an example, an account titled Charles King Revocable Trust would meet this requirement. It is not necessary that the owner's name be identified in the title -- for example, the account could be titled the King Family Trust . For deposit insurance purposes, there is no requirement that the deposit account records of the depository institution indicate the names of the beneficiaries of the living trust and their beneficiary interest in the trust. This information, however, must be contained in the formal revocable trust in order to determine the amount of deposit insurance coverage. Also, it is not necessary for deposit insurance purposes to include the names of the trustees in the account title since the trustees do not affect the amount of insurance coverage.
Living trust example with one owner and three beneficiaries
A father has a living trust leaving all trust assets equally to his three children. This trust's account would be insured up to $300,000 since there are three qualifying beneficiaries who would become owners of the trust assets when the owner dies. Unless the trust states otherwise, the FDIC will assume that the beneficiaries have an equal interest in the living trust account.
What is the deposit insurance coverage for a living trust that has more than one owner?
If a living trust has more than one owner, coverage would be up to $100,000 per qualifying beneficiary for each owner, provided the beneficiary would be entitled to receive the trust assets when the last owner dies. For example: A husband and wife are co-owners of a living trust. The trust states that upon the death of one spouse the funds will pass to the surviving spouse, and upon the death of the last owner the funds will pass to their three children equally. This trust's deposit account would be insured up to $600,000, since each owner names three qualifying beneficiaries.
How is a formal revocable trust insured if a beneficiary is not the owner's spouse, child, grandchild, parent or sibling?
The trust interest of a non-qualifying beneficiary is insured as the owner's single account funds and would be added to any other single account funds the owner may have at the same bank, and the total would be insured up to $100,000. For example: A living trust states that the trust assets will belong equally to the owner's husband and nephew upon her death. If the trust's account has a balance of $200,000, her husband's share -- $100,000 -- would be insured as her revocable trust funds and her nephew's share -- $100,000 -- would be insured as her single account funds. If, for example, the owner already had a single account for $20,000, the nephew's interest ($100,000) would be added to her other single account funds and the total would be insured for $100,000, leaving $20,000 uninsured.
How is a beneficiary's life estate interest insured?
Living trusts often give a beneficiary the right to receive income from the trust or to use trust assets during the beneficiary's lifetime (known as a life estate interest). When the beneficiary with the life estate interests dies, the remaining assets pass to other beneficiaries. Unless otherwise indicated in the trust, the FDIC will assume that a beneficiary with a life estate interest owns an equal share of the trust with the other beneficiaries. For example: A husband creates a living trust giving his wife a life estate interest in the trust with the remaining assets going to their two children equally upon his wife's death. Deposits for this trust would be insured up to $300,000 ($100,000 for each qualifying beneficiary - the wife and two children).
Are living trust accounts and "payable on death" accounts separately insured?
The $100,000 per-beneficiary insurance limit applies to ALL revocable trust accounts - payable on death (POD) and living trust accounts - that an owner has at the same bank. For example: A father has a POD account with a balance of $200,000 naming his son and daughter as beneficiaries and he has a living trust account with a balance of $150,000 naming the same beneficiaries. The funds in both accounts would be added together and $175,000 would be attributable to each child. Therefore the two accounts together would be insured for $200,000 ($100,000 per qualifying beneficiary) and uninsured for $150,000.
When an insured bank fails, what evidence will the FDIC require to determine the amount of insurance coverage for a living trust account?
If an insured bank fails, the FDIC would look to the account title to determine whether an account is held by a living trust. The FDIC would then ask the owner to provide a copy of the trust document, which the FDIC would review to identify the beneficiaries and determine their interests in the account. The owner may be required to complete an affidavit attesting to the relationship of the beneficiaries to the trust owner.
What information is required to determine deposit insurance coverage for revocable living trust accounts?
To determine deposit insurance coverage for a revocable living trust account, the FDIC would need to obtain specific information about the trust, including the following:
Who are the owners of the trust?
The owners are commonly referenced in the formal revocable trust document as trustors/grantors or settlors. Please note that for the purpose of calculating deposit insurance coverage only, the trustees, co-trustees or successor trustees are not relevant. They are administrators and have no impact on deposit insurance coverage.
Who are the beneficiaries of the trust?
The beneficiaries must be entitled to their interest in the trust when the last owner dies. Deposit insurance coverage Deposit insurance coverage is based on the interests of the beneficiaries who meet this requirement at the time the bank fails.
Do the beneficiaries meet the kinship requirement - that is, are they qualifying?
To qualify for revocable trust coverage, a trust beneficiary must be the owner's spouse, child, grandchild, parent or sibling. Stepparents and stepchildren, adopted children and similar relationships also qualify. However, ex-spouses, in-laws, cousins, nieces and nephews, friends, charitable organizations do not qualify. Also, if the trust itself is named as the beneficiary, the qualifying beneficiary requirement is not met.
What dollar amount or percentage interest has the owner allocated to each beneficiary?
The amount of coverage is based on the actual interests of each qualifying beneficiary. Unless the trust states otherwise, the FDIC will assume that the beneficiaries have an equal interest in the living trust account. If the interests or the dollar amount that each beneficiary receives is unequal, it will affect the amount of deposit insurance coverage.
Are all the beneficiaries and owners alive?
This is important because deposit insurance can change if there is a death of an owner or a beneficiary. The insurance coverage is immediately reduced upon the death a beneficiary. Upon the death of a grantor, the FDIC provides a grace period up to six months during which the account is insured as if the owner were still alive.
Does the account title at the bank indicate that the account is held by a trust?
This requirement can easily be met by using the words "living trust," or "family trust," or similar terms in the account title.
NCUA
The following information was taken directly from www.ncua.gov/ShareInsurance.
The National Credit Union Administration (NCUA) is the federal agency that administers the National Credit Union Share Insurance Fund (NCUSIF). The NCUSIF, like the FDIC’s Deposit Insurance Fund, is a federal insurance fund backed by the full faith and credit of the U.S. Government.
The NCUSIF insures member savings in federally insured credit unions, which account for approximately 98 percent of all credit unions. All federal credit unions and the vast majority of state-chartered credit unions are covered by NCUSIF insurance protection.
Credit unions that are insured by NCUSIF must prominently display the official NCUA insurance sign. No credit union may terminate its federal insurance without first notifying its members.
Here are some important facts to remember about your share insurance provided by the NCUSIF:
Not one penny of insured savings has ever been lost by a member of a federally insured credit union.
As a member of a federally insured credit union, you do not pay directly for your share insurance protection. Your credit union places a deposit into the NCUSIF and pays an insurance assessment based on the total amount of insured shares and deposits in the credit union. Federally insured credit unions are required to deposit and maintain one percent of their insured shares and deposits in the NCUSIF.
Most share accounts in federally insured credit unions are insured up to the Standard Maximum Share Insurance Amount (SMSIA), $100,000 as of April 2006, which may increase in the future. 2006 legislation increased the insurance coverage on certain retirement accounts, such as IRAs and Keoghs, up to $250,000. Generally, if a credit union member has more than one account in the same credit union, those accounts are added together and insured in the aggregate.
There are exceptions. You may obtain additional separate coverage on multiple accounts, but only if you have different ownership interests or rights in different types of accounts and you properly complete account forms and applications. For example, if you have a regular share account and an Individual Retirement Account (IRA) at the same credit union, the regular share account is insured up to $100,000 and the IRA is separately insured up to $250,000. However, if you have a regular share account, a share certificate, and a share draft account, all in your own name, you will not have additional coverage. Those accounts will be added together and insured up to $100,000 as your individual account. Additionally, shares denominated in foreign currencies are insured as outlined in NCUA Rules and Regulations.
Coverdell Education Saving Accounts, formerly education IRAs, are insured as irrevocable trust accounts and will be added to a member’s other irrevocable trust accounts and insured up to the SMSIA. Roth IRAs will be added together with traditional IRAs and insured up to $250,000.
Additional coverage is available on revocable trust or payable on death accounts on a per beneficiary basis. You can now name a parent or sibling as a beneficiary to get separate coverage. Previously, beneficiaries had to be a spouse, child or grandchild. The rules on joint accounts have been simplified. A co-owner’s interest in all joint accounts in the same credit union will be added together and insured up to the SMSIA.
The federal insurance fund has several programs to help insured credit unions which may be experiencing problems. Liquidations or failures are a last resort. If a federally insured credit union does fail; however, the NCUSIF will make any necessary payouts to the credit union’s members. These payouts are usually done within 3 days from the time the credit union closes its doors.