FDIC Simplifies Coverage Rules for Revocable Trust Accounts

Last Friday, September 26, as WaMu was taken over and then sold to JP Morgan, the FDIC made a significant chage to the way it extends coverage on beneficiaries. For those that aren't aware of it, depositors have been able to extend an additional $100,000 in insurance to each beneficiary named on an account in what is called a revocable trust. In order for the coverage to be extended, three critera were required:

1. The account title must include a commonly accepted term such as "payable-on-death," "in trust for," "as trustee for" or similar language to indicate the existence of a trust relationship. The term may be abbreviated (for example "POD," "ITF" or "ATF").


2. The beneficiaries must be identified by name in the deposit account records of the insured bank.


3. The beneficiaries must be "qualifying," meaning that the beneficiaries must be the owner's spouse, child, grandchild, parent, or sibling. Adopted and step children, grandchildren, parents, and siblings also qualify. Others including in-laws, cousins, nieces and nephews, friends, organizations (including charities) and trusts do not qualify.

In their new policy, the FDIC has eliminated the third requirement. That means that FDIC coverage can be extended to anyone as long as they are named on the account. They do not have to be a direct relative of the account holder. So now, when you want to extend coverage via your benficiaries, you simply need to fulfill the first two requirements. This is easier said then done. When dealing with the customer service rep at a bank, make sure you get someone knowledeable, who understand how to include a revocable trust beneficiary. Don't let their confusion get to you.

"We believe the interim rule will not only result in faster deposit insurance determinations after bank closings, but will help improve public confidence in the banking system," said FDIC Chairman Sheila C. Bair. "We strongly encourage owners of revocable trust accounts to make certain that the names of their beneficiaries are included in the bank's records."

The new rules were effective as of last Friday, September 26 and apply to all existing and future revocable trust accounts at FDIC-insured institutions.

With recent bank failures, there was some confusion involving revocable trusts and this is an attempt to simplify the process. It is also a way of offering more coverage on bank deposits and providing more reassurance to the public. While this is a positive for deposit holders one has to wonder if the FDIC can afford this expansion of coverage. Many believe that the insurance fund will need a bailout itself if banks continue to fail, as is expected.

Thanks to Banking Guy at Bankdeals for picking this up. The full FDIC press release is here.