We have a client who manages a deposit and savings account, which are titled as revocable trusts. The trusts are now irrevocable because the owner died two years ago. However, the accounts are “ten-year trusts” — ten years after the owner’s death, the trust will automatically split up among the four beneficiaries (or last man standing). The trust manager is one of these beneficiaries. Is each beneficiary covered by deposit insurance up to $250,000 at this time, or does the ten-year delay somehow come into play?

We believe that the trust account funds are insured in an amount of $1,000,000, or $250,000 for each beneficiary — provided that the beneficiaries are named in the account title or in your account records and that they are natural persons, charitable organizations, or nonprofits.

The FDIC’s current deposit insurance coverage regulations for revocable trust accounts — including revocable trust accounts that converted to an irrevocable trust on the death of their owners — provide the maximum amount of deposit insurance (currently $250,000) for each named trust beneficiary when the number of beneficiaries is five or fewer, as in this case.

We do not believe the ten-year delay in vesting the beneficiary’s interests in the trust or “last man standing” provision would affect the deposit insurance coverage of this trust account. While the FDIC provides separate deposit insurance coverage only for “non-contingent” beneficiaries of an irrevocable trust, this is not the case for revocable trusts, which receive separate deposit insurance coverage for each beneficiary named in the account title or in your account records. Here, the trust has converted from a revocable trust to an irrevocable trust due to the original owner’s death. However, the FDIC’s deposit insurance coverage regulations provide that an irrevocable trust account continues to be insured under the revocable trust rules even after converting to an irrevocable trust. Consequently, we believe this account would continue to receive deposit insurance coverage as provided in the rules for revocable trusts, which do not take into account whether or not a beneficiary’s interest is contingent on a later event.

Note that the FDIC recently amended its deposit insurance coverage rules to simplify how deposit insurance coverage is calculated for trust accounts by combining informal revocable trusts, formal revocable trusts, and irrevocable trusts into a single “trust accounts” category. These amendments will become effective April 1, 2024. Under the amended rules, all trust accounts are insured in an amount up to the maximum amount of deposit insurance (currently $250,000) for each named trust beneficiary when the number of beneficiaries is five or fewer. Accordingly, we believe the trust account will still be insured up to $250,000 for each of the four beneficiaries once the amendments become effective on April 1, 2024.

For resources related to our guidance, please see:

FDIC Deposit Insurance Coverage Regulations, 12 CFR 330.10(a) (“Except as provided in paragraph (e) of this section, the funds owned by an individual and deposited into one or more accounts with respect to which the owner evidences an intention that upon his or her death the funds shall belong to one or more beneficiaries shall be separately insured (from other types of accounts the owner has at the same insured depository institution) in an amount equal to the total number of different beneficiaries named in the account(s) multiplied by the SMDIA.”)

FDIC Deposit Insurance Coverage Regulations, 12 CFR 330.10(c) (“For purposes of this section, a beneficiary includes a natural person as well as a charitable organization and other non-profit entity recognized as such under the Internal Revenue Code of 1986, as amended.”)

FDIC Deposit Insurance Coverage Regulations, 12 CFR 330.1(o) (“Standard maximum deposit insurance amount, referred to as the ‘SMDIA’ hereafter, means $250,000 adjusted pursuant to subparagraph (F) of section 11(a)(1) of the FDI Act (12 U.S.C. 1821(a)(1)(F)).”)

FDIC, Deposit Insurance Coverage Regulations, 12 CFR 330.10(h) (“Notwithstanding the provisions in section 330.13 on the insurance coverage of irrevocable trust accounts, if a revocable trust account converts in part or entirely to an irrevocable trust upon the death of one or more of the trust’s owners, the trust account shall continue to be insured under the provisions of this section. (Example: Assume A and B have a trust account in connection with a living trust, of which they are joint grantors. If upon the death of either A or B the trust transforms into an irrevocable trust as to the deceased grantor’s ownership in the trust, the account will continue to be insured under the provisions of this section.).”)

FDIC, Simplification of Deposit Insurance Rules, 86 Fed. Reg. 41766, 41770 (August 3, 2021) (“The current revocable trust rule also contains a provision that was intended to reduce confusion and the potential for a decrease in deposit insurance coverage in the case of the death of a grantor. Specifically, if a revocable trust becomes irrevocable due to the death of the grantor, the trust’s deposit may continue to be insured under the revocable trust rules. Absent this provision, the irrevocable trust rules would apply following the grantor’s death, as the revocable trust becomes irrevocable at that time, which could result in a reduction in coverage.”)

FDIC, Simplification of Deposit Insurance Rules, 87 Fed. Reg. 4455, not effective until April 1, 2024 (“The Federal Deposit Insurance Corporation (FDIC) is amending its regulations governing deposit insurance coverage for deposits held in connection with trusts. The amendments merge the revocable and irrevocable trust categories into one category, ‘trust accounts.’ Coverage for deposits in this category will be calculated through a simple calculation. Each grantor’s trust deposits will be insured in an amount up to the standard maximum deposit insurance amount (currently $250,000) multiplied by the number of trust beneficiaries, not to exceed five. This, in effect, will limit coverage for a grantor’s trust deposits at each IDI to a total of $1,250,000; in other words, maximum coverage of $250,000 per beneficiary for up to five beneficiaries.”)

FDIC Deposit Insurance Coverage Regulations, 12 CFR 330.10(a), not effective until April 1, 2024 (“This section governs coverage for deposits held in connection with informal revocable trusts, formal revocable trusts, and irrevocable trusts not covered by § 330.12 (‘trust accounts’). For purposes of this section:

(1) Informal revocable trust means a trust under which a deposit passes directly to one or more beneficiaries upon the depositor’s death without a written trust agreement, commonly referred to as a payable-on-death account, in-trust-for account, or Totten trust account.

(2) Formal revocable trust means a revocable trust established by a written trust agreement under which a deposit passes to one or more beneficiaries upon the grantor’s death.

(3) Irrevocable trust means an irrevocable trust established by statute or a written trust agreement, except as described in paragraph (f) of this section.”)

FDIC Deposit Insurance Coverage Regulations, 12 CFR 330.10(b), not effective until April 1, 2024 (“Trust deposits are insured in an amount up to the SMDIA multiplied by the total number of beneficiaries identified by each grantor, up to a maximum of 5 beneficiaries.”)

FDIC Deposit Insurance Coverage Regulations, 12 CFR 330.10(c)(1), not effective until April 1, 2024 (“Subject to paragraph (c)(2) of this section, beneficiaries include natural persons, as well as charitable organizations and other non-profit entities recognized as such under the Internal Revenue Code of 1986, as amended.”)

FDIC Deposit Insurance Coverage Regulations, 12 CFR 330.10(c)(2), not effective until April 1, 2024 (“Beneficiaries do not include: (i) The grantor of a trust; or (ii) A person or entity that would only obtain an interest in the deposit if one or more identified beneficiaries are deceased.”)