We often ask our trust and estate planning clients, "What frightens you the most?"  "What keeps you awake at night that relates to the planning you are doing for yourself and your loved ones?"  Following last week's bank failure at IndyMac, several clients expressed concern about FDIC insurance coverage and how it relates to accounts owned by their living trusts.

The answer may be surprising and encouraging:  Sometimes FDIC insurance coverage is superior for an account owned by a person's living trust compared with an identical account owned by the same person outright and free of any trust.

Why? 

The reason is the way the FDIC rules count "qualifying beneficiaries".  The FDIC regulations state that insurance availablity is "per 'qualifying' beneficiary designated by the owner of the account.  If there are multiple owners of a living trust account, coverage is available separately for each owner.  Qualifying beneficiaries are defined as the owner's spouse, children, grandchildren, parents, and siblings."

Here's an example of what is meant by this convoluted language:  First assume that a husband and wife couple, H & W, own a bank account as joint tenants with rights of survivorship.  The FDIC insurance covering the account is up to $100,000.  Now assume that the same couple creates a joint revocable living trust and change the account ownership to "H & W, trustees of the the H & W Living Trust.  Suddenly the FDIC insurance coverage for the same funds rises to $200,000 for each beneficiary who would take if H & W died immediately and simultaneously.  So, if this hypothetical couple together has 3 children who would be their trust beneficiaries, the FDIC insurance coverage leaps to $600,000!

Of course, the regulations go on and add qualifying language.  An account owned by a revocable living trust account will be so insured only if certain requirements are met:

1.  To qualify, the beneficiary of the trust must be the owner's spouse, child, grandchild, parent, or sibling.  Step-parents and step-children, adopted children and similar relationships also qualify.  But, "in-laws", cousins, nieces, nephews, and charitable organizations do not qualify.

2.  The trust beneficiary must become entitled to his or her interest in the trust when the owner dies -- and coverage is determined by the beneficiaries who meet this requirement at the time of the bank failure.  To illustrate:  Assume that a living trust identifies the three children of the owner as the beneficiaries of the trust; and also states that each beneficiary's share will pass to his or her children if the original beneficiary dies before the owner of the trust.  This is a common scenario.  If all three of the beneficiary children are living at the time of the trust owner's death, only they will be beneficiaries for purposes of this insurance coverage.  If all three of the children are living at the time of the bank failure,  the insurance coverage would be computed based on their lives and not the additional lives of their own descendants. The insurance coverage for that trust's deposit accounts at a particular banking institution would be $300,000 even if those adult children also had several descendants among them. Still and yet, the result is far superior to the alternative of an individual owning the the account outright and free and clear of any trust.

3.  The account title at the bank must indicate that the account is indeed owned by a living trust.  This rule can be met by using the terms "living trust", "family trust", and similar words in the account title.  Remember, as we remind our clients:  Be in charge.  Do not let the bank teller do you estate planning or asset protection planning for you!

For further information go to the FDIC web site at:  http://fdic.gov/news/financial/2004/fill404b.html.