Complex rules govern FDIC insurance of trust funds

The importance of knowing how FDIC insurance covers trust funds is emphasized in Gail Liberman & Alan Lavine, Are Your Trust Funds Insured?, Wall St. J., July 8, 2008.

Here are a few excerpts from this article:

If your bank deposits are sheltered in a complex trust agreement, their FDIC insurance coverage could prove skimpier than you might think.

That is, unless you use care to keep fully abreast of the FDIC’s ever-changing rules. * * *

Under FDIC rules, a revocable trust * * * may qualify for up to $100,000 in coverage per beneficiary per bank. But that added coverage is available only if the beneficiary happens to be a spouse, child, grandchild, parent or sibling. Blended families, such as stepchildren and adopted children, also are allowed. Nieces and nephews don’t qualify.

Once a trust becomes irrevocable, which frequently happens when somebody dies, different FDIC rules kick in. No longer is the beneficiary required to be a specific type of relative.

However, “irrevocable trusts often cannot be FDIC-insured for more than $100,000,” said Martin Becker, senior consumer affairs specialist in the FDIC’s deposit insurance section. That’s because rules for irrevocable trusts are stricter.

The article contains a very useful discussion using the typical AB trust as an example.

Special thanks to Patrick S. Sylvester (Attorney, Wilmette, IL) for bringing this article to my attention.