Are your bank accounts safe? A summary of FDIC insurance coverage

By now, many of you have heard about the recent collapse of Silicon Valley Bank and the resulting instability in the banking industry, raising an alarming question of whether customer deposits held at banks are protected and to what extent. The Federal Deposit Insurance Corporation (the “FDIC”) is an independent governmental entity that provides limited insurance coverage for customer deposits at qualifying banks in the United States in the event of a bank failure.  The rules governing coverage amounts vary depending on whether the account is owned by one person, co-owners, through a trust or legal entity, among other factors.  Below is a high-level summary of coverage for common types of accounts.  For more comprehensive information about eligibility and coverage, please visit the FDIC website. 

Are all banks in the U.S. insured?

No, not all banks in the U.S. are FDIC insured. To see if your bank is covered, click here and type in the name and location of your bank to verify coverage and obtain more information.

How much coverage do I have?

Generally, the FDIC standard insured amount is $250,000 per depositor, per insured bank, and per ownership category. Below is a summary of coverage limits by account ownership category provided by the FDIC: 

What if I have multiple accounts at the same bank?

All accounts owned by the same person at the same bank are aggregated for determining FDIC insurance coverage, whether they are held in a sole account, joint account, retirement account, or trust account.  Similarly, multiple trust accounts at the same bank which name the same beneficiary will be aggregated for determining coverage.

What is a “unique beneficiary” for a trust?

Revocable trusts

For revocable trusts, each owner/grantor can apply up to $250,000 of insurance coverage for up to 5 “unique” identifiable beneficiaries other than the owner/grantor who is entitled to an interest in the trust when the owner/grantor dies. A “beneficiary” includes a natural living person, a charitable organization or other non-profit entity, but not a contingent beneficiary (someone who only receives a gift if the named beneficiary is not living). The fact that FDIC coverage is available in this manner is counterintuitive because – as the name suggests – the owner/grantor can revoke the trust or change the beneficiary at any time. Here are some examples of how this rule is applied:

Example 1

You are the sole grantor of a revocable trust. You open a trust bank account funded with $1,500,000.  The trust provides that after your death, a gift of $50,000 is to be made to charity, $300,000 to each of your 2 children, and the remainder in trust for your spouse (for a total of 4 different beneficiaries).  The maximum amount of coverage would be calculated as follows: $250,000 x 4 unique beneficiaries = $1,000,000.  $1 million of the account is insured, and the remaining $500,000 in the account is uninsured and could be lost if the bank fails.

Example 2

You and your spouse are joint grantors of revocable trust.  Together, you open a trust bank account funded with $1,750,000.  The trust provides that upon both of your deaths, a gift of $50,000 is to be made to charity, $100,000 to 2 friends, and the remainder in trust for your 2 children (for a total of 5 beneficiaries).  The maximum amount of coverage would be calculated as follows: The number of account owners (2) x $250,000 x 5 beneficiaries = $2,500,000.  The entire account is insured.  

If there are more than 5 identifiable beneficiaries and the aggregate account balance at a single bank is more than $1,250,000, the coverage depends on whether the beneficiaries have equal or unequal interests, but is generally the maximum of the greater of (1) $1,250,000 and (2) the aggregate of each different beneficiary’s interest up to a limit of $250,000 per beneficiary.    

Irrevocable trusts

For an irrevocable trust, a “unique beneficiary” includes each non-contingent beneficiary (e.g., a beneficiary who is entitled to receive trust assets without requiring the consent or discretion of a trustee).  On the other hand, all contingent beneficiaries will be insured for a combined $250,000, regardless of the number of beneficiaries.  If an irrevocable trust account contains both contingent and non-contingent interests, the two types of funds will be separated with different rules applied.  Because many irrevocable trusts give the trustee discretionary power to make distributions, the interests of beneficiaries are contingent and the FIDC insurance is therefore limited to $250,000.      

**Please note that new simplified rules for trusts will go into effect on April 1, 2024. At that time, a deposit owner’s trust deposits, whether held by a revocable or irrevocable trust, will be insured up to $250,000 per trust beneficiary (without regard for contingencies), up to 5 beneficiaries. This effectively means that there will be a maximum coverage of $1,250,000 per owner, per bank, for trust accounts. 

This is complicated. Are there any tools to help me calculate coverage?

Yes, the FDIC has provided a helpful way to calculate exact coverage amounts on their website here.  To use this calculator, it is important to enter all accounts held at a single bank to ensure that the relationship and total coverage indicated are accurately determined. 

What is not insured by the FDIC?

Investments in mutual funds, U.S. Treasury bonds, annuities, stocks, bonds, or other securities, life insurance policies, and contents of a safe deposit box are not insured, even if they were invested or placed at an insured bank.

Do I have to apply for insurance?

No, so long as your bank is FDIC insured and the account is a covered type, insurance coverage is automatic. 

What can I do to increase insurance coverage? 

Because the FDIC rules apply for each separate insured bank, you could deposit your funds at several different banks.  If that is ineffective or impractical, another valuable option is to deposit your funds in an “insured cash sweep” (ICS) account at a single bank, which then deposits your funds for you at other ICS network banks behind the scenes so that you access full FDIC Insurance coverage from many institutions while working with only one bank. Not all banks participate in the ICS program. To find out if your bank does, search here.  To learn more about ICS accounts, you can see a program description provided by Manufacturer’s Bank, one of the banks that offer ICS accounts, here. 

I still have questions. Can you help?

Yes, we are happy to assist you in determining your coverage eligibility and limits for your various account holdings. Feel free to reach out any time to discuss.