Exploring FDIC Coverage: Know Your Limits

With bank failures such as Silvergate Bank, Silicon Valley Bank, and Signature Bank in the news the topic of FDIC is now, more than ever, top of mind for professional fiduciaries and individual investors. Many may know that FDIC coverage is based on account type, but not everyone may know the unique rules covering revocable and irrevocable trusts. To that point, here is a primer on how FDIC coverage works.

FDIC Coverage Categories

FDIC insurance provides up to $250,000 in coverage for deposit accounts. Bank customers do not need to apply for FDIC insurance as long as an account is opened at an FDIC-insured bank or financial institution. Insurance coverage is based on account ownership type, and not per account.

FDIC covers the following ownership categories:

Individual Accounts: Individual accounts are an account owned by one person without any named beneficiaries. These would include checking accounts, savings accounts, and money market deposit accounts. All these accounts are added together and the aggregate is insured for up to $250,000.

So, for example, a person who has two individual accounts at a bank of $250,000 would only have total coverage of $250,000 between the two accounts. This is because the same account type in aggregate is $500,000 and FDIC only insures up to $250,000 per individual account type.

Joint Accounts: Joint accounts are accounts owned by two or more people without beneficiaries. The account owners must be living people and have equal rights to make withdrawals.  According to the FDIC the account owners must also sign the deposit account signature account unless the account is a Certificate of Deposit.

Retirement Accounts: Although it’s more common to see retirement accounts opened at a brokerage (which would be covered by SIPC and not FDIC), retirement accounts opened at a bank would be covered separately as its own account type. These accounts include IRAs, 401Ks or profit sharing plans, self-direct Keoghs, and 457 plans.  All retirement accounts are added together and the combined amount is insured for up to $250,000.

Revocable Trusts: Revocable trusts have unique coverage compared to other account types. If a deposit account identifies one or more beneficiaries who will receive the deposits upon the death of the owner, this is considered a Revocable Trust Account type by the FDIC. Living Trusts and Family Trusts fall under this category, as well as accounts that are Payable on Death (POD).  Beneficiaries can be individuals, charities and non-profit organizations.  It is important that there are records of the beneficiaries being named, either through the bank’s records, or from the trust document.  What’s unique about revocable trust accounts is that the account owner is insured up to $250,000 per beneficiary.  There are some additional nuances for situations where a trust has more than 5 beneficiaries.

Irrevocable Trusts: Irrevocable Trusts, on the other hand, will only cover each beneficiary if the beneficiaries are non-contingent beneficiaries (similar to how revocable trusts work). However, if beneficiaries are contingent, then the interests are added up in aggregate and covered up to $250,000. This logically makes sense, as an irrevocable trust will normally have its own EIN number and contingencies could make it so that the assets would remain with the trust.

The FDIC notes that since irrevocable trusts normally provide contingencies for its beneficiaries, it is most likely that the account is only covered for up to $250,000. 

But what about irrevocable trusts that were formally revocable until the account owner passed away? The FDIC has clarified that a revocable trust that becomes an irrevocable trust because of the death of the grantor will still be insured under the original rules of revocable trusts.

It is important to note that the rules for revocable and irrevocable trusts are in effect until April 2024. Starting April 1, 2024, the FDIC’s new rules will apply.  These new rules are intended to simplify the complicated rules explained above that currently cover irrevocable and revocable trusts. In 2024, FDIC coverage for trusts, regardless if the trust is revocable or irrevocable and regardless of contingencies, will be up to $250,000 per beneficiary up to a maximum of 5 beneficiaries (i.e., maximum limit of $1,250,000).  

FDIC Coverage Calculator

So how would one go about calculating FDIC coverage at a bank? First identify the number of accounts held by account type held at the bank for accounts that are not joint or revocable trust accounts. Sum up the aggregate total for each account type. Any excess above an amount of $250,000 would not be covered.

For joint accounts, sum up the joint accounts, and determine the amounts held by each joint account owner. Then, check if the total amounts are excess of $250,000.  Any amount over $250,000 would not be covered. 

For example, a father has $250,000 in a joint account with his son and $250,000 in a joint account with his daughter. The father is insured for $250,000 ($125,000 for each account since as the joint owner the father has 50% ownership), and the children are insured for $125,000 each. The total insured is $500,000.

For revocable trust accounts, identify the number of beneficiaries. If there are more than 5 beneficiaries, refer to the FDIC’s insured deposits rules. For 5 or less beneficiaries, multiply the number of beneficiaries by $250,000. This total is the amount of available FDIC coverage. Subtract this number from the current trust account balance to determine if there is sufficient FDIC insurance. A positive number means there is not enough insurance.  

For example, if a revocable trust has 4 beneficiaries with an account balance of $1,200,000, the 4 beneficiaries each have FDIC coverage of up to $250,000 for a total of $1,000,000.  However, since the account balance is $1,200,000, this means there is an excess of $200,000 over FDIC limits, or $50,000 in excess per beneficiary.

In general, FDIC limits are a bit more complicated than the known $250,000 limits. Feeling up for a test? Take the three question quiz below to test your knowledge.  And if you have concerns about what to do if accounts are in excess of FDIC coverage limits, Prudent Investors advisors  are here to assist and guide you with any questions you may have.

SIPC/FDIC Quiz:

1.  Mr and Mrs. Jones have the following accounts at one bank in cash:

Husband’s checking                                    $100,000

Wife’s Checking                                            $50,000

Husband and Wife Joint Account           $200,000

Husband with son joint account             $100,000

Husband IRA account                                 $50,000

What amount is currently insured with the FDIC?

A: $275,000     B. $375,000     C. $500,000

Answer:

C. $500,000

2. What is the maximum amount of FDIC Insurance available to a married couple holding individual, joint, and revocable trust beneficiary accounts at one bank?  Note the revocable trust has two primary beneficiaries (husband and wife).

A. $1,000,000 B. 1,250,000 C. $1,500,000 D. $1,750,000

Answer: C. $1,500,000

Answer explanation: $250,000 individual for both, $250,000 joint for both, $250,000 revocable trust beneficiary account coverage for both

3.   Mr. Paul has the following assets at one FDIC insured bank. How much is covered for Mr. Paul.

Asset                                 Titling                                                Balance

CDs                                    Mr. Paul                                           $300,000

Money Market              Mr. Paul                                           $50,000

IRA Rollover                    Mr. Paul                                           $200,000

Savings Joint                   Mr. Paul with daughter             $100,000

Savings Joint                   Mr. Paul with son                         $100,000

Checking Joint               Mr. Paul with Wife                      $350,000

A: $700,000     B. $975,000     C: $750,000     D: $1,075,000

Answer: B. $975,000

Answer Explanation: CDs = $250,000 (not $300,000, since FDIC insures max $250,000 per account type)

Money Market: Not insured (he’s over the $250,000 limit)
IRA Rollover: $200,000
Joint with Son: $50,000
Joint with Daughter: $50,000
Joint with wife: $150,000 (not $175,000 since max insured is $250,000 across all joint accounts)

Other joint accounts total $275,000 ($50,000 son, $50,000 daughter, $175,000 wife)

4.  A trust you manage has $100,000 money in a money market fund at ABC Brokerage.  This week, you find out ABC Brokerage has gone bankrupt.   How will recovery of the $100,000 be covered?

A. Covered through SIPC
B. Covered through FDIC
C.  Neither FDIC or SIPC

Answer: A. Covered through SIPC

5.  A money market mutual fund breaks the buck (i.e., the daily price of the fund goes below a dollar) in a DEF brokerage account.  You have $100,000 in the fund.  How will recovery of the $100,000 be covered?

A. Covered through SIPC
B. Covered through FDIC
C. Neither FDIC or SIPC

Answer: C.  Money market mutual funds are not guaranteed by FDIC.  It’s not guaranteed by SIPC either because it’s the money market fund that is having issues, not the brokerage. Nowhere in the question does it say the brokerage is going bankrupt.

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