NEW FDIC RULES FOR LIVING TRUSTS
The Federal Deposit Insurance Corporation, or FDIC, recently simplified its rules for living trust bank accounts. This simplification will give many bank account holders the peace of mind that comes with knowing that their money is insured.
I don’t know exactly how many times a client has expressed concern to me about having more than $100,000 in any one bank account, but it’s been a lot. People, on average, are very worried about having more than $100,000 in a bank account because the FDIC insurance limit on any bank account – or so most people think – is $100,000.
A “living trust” is what is known in estate planning parlance as a Will-substitute. You might be thinking, Well, that’s nice, John, but I’m not an estate planning attorney, so why don’t you tell me what that means in plain English.
What I mean is, a living trust acts like a person’s Last Will and Testament when the person who created the trust dies. Most people have a living trust created for them by an attorney to avoid probate. The client perceives that probate is a time-consuming, costly procedure, something to be avoided.
The truth is, probate is far from time-consuming and very inexpensive (at least in New Jersey), but perception often drives our actions far more than reality. Based upon their perception of probate, people have living trusts drafted, deposit their assets into accounts (for example, bank accounts) owned by the living trust, and hope to avoid probate.
A typical living trust, like a Will, might have provisions such as the following: Everything to my wife, then to my children if my children have attained the age of twenty-five, or graduated from college, or some other contingency. These contingencies are know as “defeating contingencies” because the contingency has the potential of defeating the beneficiary’s right to the inheritance, if the contingency does not occur.
In other words, if the child is not twenty-five when the trust owner dies, the child will not receive his share of the trust owner’s estate. The age requirement has the ability to defeat the child’s right to the inheritance.
Under both the new and old FDIC rule, the FDIC will provide up to $100,000 of insurance coverage for each “qualifying beneficiary” of an account who is entitled to the assets of the living trust upon the account owner’s death. Under the new FDIC rule, unlike under the old rule, the new rule does not limit insurance coverage if the trust instrument contains defeating contingencies.
From a practical standpoint, what this means is, if a trust names three children as beneficiaries, the children would be entitled to up to $300,000 of coverage, even if there were a contingency on the children receiving the money.
The new rule also eliminates the existing requirement that beneficiaries of a living trust be named in the records of the bank. The FDIC has determined that the existing rule, which requires registration of each beneficiary, is burdensome and unnecessary, particularly in light of the fact that living trusts can be amended to add or eliminate beneficiaries.
The new rules are effective April 1, 2004, but the FDIC will begin applying the new rules to any account at a bank that fails, if the new rules would benefit the beneficiaries.
Rules governing living trusts and FDIC insurance rarely attract much attention until someone discovers that an assumption was wrong. Changes that make these rules easier to understand benefit not only trust owners, but also the family members who may eventually need to manage those accounts. Clarity matters when financial security is at stake.