A Revocable Living Trust Can Give You 7 Times More Insurance Coverage
The recent collapse of Silicon Valley Bank (SVB), the second largest bank collapse in United States history shocked the country. The crisis had many people wondering, “Is my money safe at a bank?” Many companies withdrew all of their funds while the crisis was looming and federal regulators were expected to take over.
As a result, the term FDIC insurance re-emerged as a buzzword in our national discourse. Naturally, this amount of attention placed on FDIC insurance brings forth many questions regarding the parameters and requirements surrounding FDIC insurance coverage. In short, FDIC insurance covers account holders up to $250,000 in funds.
From an estate planning perspective, all this talk about FDIC insurance brings forth an important question: is FDIC insurance coverage really limited to $250,000, or are their scenarios where an individual, or a family, can benefit from higher levels of coverage?
Here, we’ll explain everything you need to know about this issue and how you can get more insurance coverage for your money by using a revocable living trust.
What Is FDIC Insurance?
FDIC stands for the Federal Deposit Insurance Corporation. This entity insures deposits and supervises financial institutions. Its role is basically to prevent a financial crisis that could occur if banks could not provide bank customers with the funds they have deposited.
The FDIC promotes confidence and stability in the banking industry because it lets consumers place their money in insured banks, knowing that their deposit is safe and backed by the federal government.
FDIC insurance covers traditional deposit accounts, including:
- Checking accounts
- Savings accounts
- Certificates of deposit (CDs)
- Money market deposit accounts
- Prepaid cards
FDIC insurance automatically applies to these types of accounts, so a consumer does not need to apply for FDIC insurance. However, it is important that consumers understand that not all products that banks offer are covered by FDIC insurance.
History of FDIC Insurance
Leading up to the Great Depression and Black Tuesday, an average of 600 banks failed per year between 1921 and 1929, ten times the average failure rate for the preceding decade. However, the worst of times was yet to come. The Great Depression increased cash withdrawals from banks, and many banks were not able to meet these demands. This led to so-called bank runs and the collapse of many banks. In 1933, more than 4,000 banks had closed within the early months of the year or during the federally-mandated bank holiday.
President Franklin D. Roosevelt made a speech about the need for the American people to have confidence in the financial system, leading to the eventual creation of the FDIC in 1933.
How Does FDIC Insurance Work?
Let’s look at how FDIC insurance would work in a hypothetical situation. Say Tom has $200,000 in cash he has been storing inside his mattress. He decides to deposit the cash in his local bank, XYZ Bank. When Tom deposits the funds, he gets a notice stating that the account is FDIC insured.
Now, let’s say that XYZ Bank has been making risky decisions and bad loans. XYZ fails. Because the account was FDIC-insured, the FDIC reimburses Tom his $200,000 and Tom is okay because his account is insured up to the limit, which is $250,000.
The FDIC has videos that explain more details about how this insurance works.
Amount of FDIC Insurance
The original amount of FDIC insurance was $2,500. Today, it is $250,000 per depositor, per insured bank, for each account ownership category. The amount of FDIC insurance depends on how the FDIC categorizes the ownership.
Here are the FDIC insured limits for each type of account ownership:
| Type of Account | FDIC Insurance Limits |
| Single Accounts | $250,000 |
| Certain Retirement Accounts | $250,000 |
| Joint Accounts | $250,000 |
| Revocable Trust Accounts | $250,000 for each beneficiary, but when there are more than five beneficiaries, the calculation isn’t as straight forward |
| Irrevocable Trust Accounts | $250,000 |
| Employee Benefit Plan Accounts | $250,000 per employee’s non contingent interest |
| Corporations/Partnership/Unincorporated Association Accounts | $250,000 |
| Government Accounts | $250,000 |
Products That Are Not Covered by FDIC Insurance
Not all products that banks offer are covered by FDIC Insurance, including:
- Safe deposit boxes and their contents
- Stock or bond investments
- Municipal securities
- Mutual funds
- Life insurance policies
- Annuities
- Cryptocurrency
- U.S. Treasury bills, bonds, or notes
What If My Financial Product Is Not FDIC Insured?
FDIC is only one potential type of insurance. There may be other insurance that covers losses you may encounter if your financial product is lost or stolen, the bank fails, or a robbery occurs. For example, some other types of insurance that may protect you might include:
- Securities Investors Protection Corporation insurance – The Securities Investors Protection Corporation (SIPC) replaces up to $500,000 in missing stocks and other securities in customer accounts if a member or bank brokerage subsidiary fails.
- Fire and theft insurance – Fire and theft insurance may protect against losses caused by these reasons, including the contents of safe deposit boxes.
- Full faith and credit – U.S. Treasury bills, bonds, and notes are backed by the full faith and credit of the U.S. government.
- Bank insurance – The individual bank may have their own insurance that protects their products.
- Banker’s blanket bond – This multi-purpose insurance policy protects banks from fire, flood, earthquake, embezzlement, theft, and other losses.
Keep in mind that these are insurance products. If you have investments, their value can increase or decrease, so you can lose money with them, and there is no guarantee you will receive a profit.
FDIC Insurance and Revocable Trusts
FDIC insurance covers up to $250,000 per unique beneficiary of a revocable trust, per current rules. However, new rules are set to become effective on April 1, 2024 that will combine the revocable and irrevocable trust account categories into one FDIC ownership category, which can reduce the coverage for depositors who have placed more than $1.25 million in trust deposits at a single insured institution. In the same vein though, the coverage of others will go up, for example those grantors with irrevocable trusts who today are limited to $250,000 in FDIC insurance coverage regardless of how many beneficiaries they have.
The Current Bank Crisis
With this background on FDIC insurance, we can look at the current bank crisis and answer pressing questions like:
- Is my money safe at a bank?
- Is my money safe in a bank safe?
- What if I have more than $250,000 deposited?
- Can I get more than $250,000 in FDIC insurance?
- What mechanisms can I use to get more FDIC insurance?
Silicon Valley Bank (SVB)
Silicon Valley Bank’s collapse came as a surprise to many people since it was the second largest bank failure in U.S. history, second only to Washington Mutual’s collapse in 2008. It was the 16th largest bank in the United States.
The collapse of SVB resulted after several market forces combined. The Federal Reserve began raising interest rates in 2022 to try to counteract inflation. Higher borrowing rates slowed growth of tech stocks that had previously benefited SVB. These higher rates also diminished the value of long-term bonds SVB held. The bank held $21 billion in bonds, which yielded only an average of 1.79%, less than the 10-year Treasury bond rate. The bank announced it had sold many securities at a loss and would sell $2.25 billion in new shares to improve its balance sheet. Venture capital also began easing. These factors caused many of the bank’s customers to complete a run on the bank and demand their deposits.
The bank’s stocks began plummeting, and the FDIC began a receivership over it after California regulators stepped in.
In SVB’s context, before the recent news about the FDIC’s intent to cover all deposits in full, account holders were expecting to have access to a maximum of $250,000 when they woke up Monday morning March 13, 2023. That was a frightening position to be in.
Signature Bank
The Signature Bank failure was a consequence of the SVB collapse. On Friday, March 10, 2023 customers who were concerned about the impending collapse of SVB withdrew more than $10 billion in deposits from SIgnature Bank, leading to the third-largest bank failure in U.S. history.
Consumers who had uninsured deposits were worried that they could be locked out of them or that they would lose value, which is a significant problem for startups that relied on the bank and had a reputation for being more business-friendly than large banks. Crypto deposits helped the bank drum up even more funds, resulting in a high of $16.5 billion in crypto deposits.
However, the bank could not withstand the outsized demands on deposits. The New York State Department of Financial Services and the FDIC closed Signature Bank and announced that it was being taken over to protect depositors and the financial stability of the country. Like with SVB, the FDIC has committed to making all depositors whole, beyond the $250k insurance limit.
First Republic
First Republic is another bank that is feeling the stress of the SVB collapse. The Wall Street bank’s shares fell 47% on March 20, 2023, down 90% since its close on March 8, 2023 when Silicon Valley Bank’s failure was imminent and leading to a financial panic. The New York Stock Exchange halted trading eleven times on March 20, 2023 to prevent the collapse of the bank.
Until recently, the bank boasted an impressive $176 billion in deposits. Some of the bank’s wealthy clients infused $30 billion into the bank and bank leaders sought to sell a stake in the business to calm investors, but these efforts have failed to quell concerns. However, the bank has reportedly lost $70 billion in deposits in recent weeks. The bank’s reliance on short-term borrowing and high proportion of fixed-rate assets at the bank may have negatively affected its financial stability.
Pacific Western
After problems with larger banks arose, midsize banks such as Pacific Western have come under intense pressure and scrutiny. The Los Angeles bank also saw a run on its banks after the SVB failure, but it was not as severe as some of the other banks. The bank realized a 20% drop in deposits, leading the bank to tap credit lines and raised over $1.4 billion in cash. It also borrowed $15 billion from federal programs to further ensure it could meet customers’ needs. The bank’s shares have recently fallen 17% by Wednesday, March 22, 2023 after losing more than half its market value within the past month.
The bank has approximately $27.1 billion in deposits with $11.4 billion in cash. About one-quarter of the deposits are held by the unit serving the startup and venture capital industry.
Silvergate Bank
Silvergate Bank, known for its focus on cryptocurrency and tech startups, has also ceased operations and is liquidating.
How You Can Use a Revocable Living Trust to Increase FDIC Insurance
All of the bank failures and the market concerns over the financial industry have motivated a closer look into FDIC insurance and ways to maximize insurance. It is possible to increase the FDIC insurance. One mechanism is using a revocable living trust.
Here’s an example of how this works:
Let’s say Tom has $1,750,000 in cash sitting in his personal bank account. Technically speaking, only $250,000 of his cash funds would be insured, leaving $1,500,000 at risk of disappearing with the collapse of his bank. That would be devastating. Remember, SVB was the 16th largest bank in the U.S., so any top notch bank could collapse is a real possibility.
So the question for Tom: Can he restructure his cash allocation somehow such that all $1,750,000 can be insured?
The answer is yes and the vehicle for doing so would be for him to set up a revocable living trust for his family, open a bank account in the name of the trust, and transfer most of his cash into that account. With a trust, he will exponentially increase the amount of his FDIC insurance coverage without needing to diversify his cash across multiple banks.
How is this possible? The FDIC insures bank accounts opened under a revocable living trust at an amount of $250,000 per beneficiary. To make things even more interesting, the FDIC will treat the beneficiaries of each spouse separately, which means that each beneficiary can technically be insured up to $500,000 in the aggregate if the estate is split 50/50 between the spouses, and assuming each spouse lists the same beneficiaries.
So, if Tom is married to Sarah, they can set up a trust together with each being an owner of a trust. If they had three children, they can list each child as a beneficiary for both of their estates. They can then open a bank account under the trust’s name at the same bank that Tom has his personal account. That trust account will now be insured at an amount of $750,000, separately for each spouse, giving the account a total of $1,500,000 in FDIC insurance coverage. That’s already six times more than where Tom started with his personal account!
To take another bite at the apple, Tom could decide to keep $250,000 in his personal account after transferring the rest to the trust account. If he does so, his personal checking account will enjoy an additional $250,000 in FDIC insurance coverage since his personal account is treated as a separate insurable ownership category than the trust account.
In other words, he will have access to these two bank accounts at the same bank and both accounts will be insurable at their separate limits. And now, voilà, all $1,750,000 of his original cash position is now FDIC insured, 7 times more than what Tom had started with before setting up his trust! See the tables below for a better visual comparison.
FDIC Coverage Before Setting up a Revocable Living Trust
| Account | Owner | Account Size | Insurable Amount |
| Personal Checking Account | Tom | $1,750,000 | $250,000 |
FDIC Insurance Coverage After Setting up a Revocable Living Trust
| Account | Owner | Account Size | Insurable Amount |
| Personal Checking Account | Tom | $250,000 | $250,000 |
| Trust Account | Tom and Sarah | $1,500,000 | $1,500,000 |
| Total | $1,750,000 | $1,750,000 |
Takeaway
FDIC insurance protects your bank deposits, but only up to a certain amount. However, using a revocable living trust can substantially increase these insurance limits.