Have more than $250,000 in the bank? Here’s how to protect it

With the recent failure of Silicon Valley Bank and the collapse of Signature Bank shortly after, many depositors are understandably concerned about the safety of holding their money in banks. While $250,000 is being highlighted as the maximum amount insured by the FDIC, the number is somewhat misleading - $250,000 is the maximum deposit insurance amount per depositor. However, the location and form of your accounts can provide insurance in excess of $250,000.

Here are some ways to maximize FDIC protections.

Multiple Single and Joint Ownership Accounts

The most commonly-known option is to hold your funds in multiple accounts and across multiple institutions. However, simply opening two accounts at the same bank may not provide additional protections. The FDIC insures accounts of the same type in aggregate, meaning they take all of a person’s accounts of the same type at the same bank and insures them together up to a maximum of $250,000, as if all funds were held in the same account. In order to receive additional protections within the same bank, the amounts must be held in accounts that are insured separately, such as a single ownership account and a joint ownership account. For example, spouses that each have an account in their own name and a joint account at the same bank would be eligible for up to $1,000,000 in FDIC protection ($250,000 each on the individual accounts and $500,000 on the joint account).

Alternatively, depositors can maximize FDIC protections by opening accounts at different banks or different branches of the same bank (so long as separately chartered and insured). For example, a depositor with three single ownership accounts at three separately-insured banks would receive total protections of up to $750,000. However, before you make a trip to each of your local banks, consider the following alternatives.

Revocable Trust Accounts

If your goal is to protect money held for your children, a charity, or other beneficiaries, a revocable trust account may be a good option. Revocable trust accounts are insured separately from other accounts, with each beneficiary generally protected up to $250,000. However, beneficiaries are also subject to aggregation, meaning if they are beneficiaries on more than one revocable trust account in the same bank, their proportional interests will be added and insured together – this is true even if the accounts are different types of revocable trust accounts, such as a revocable trust account and a payable-on-death account. The protections for revocable trust accounts also depend on factors such as the amount in the account, the number of beneficiaries, and the number of owners.

Revocable trust accounts with more than $1,250,000 and more than five beneficiaries have minimum FDIC protections of $1,250,000; however, they have the capacity for even higher protections. The amount of FDIC insurance for these accounts is determined using the greater of $1,250,000 (five times the maximum deposit insurance amount) or the aggregate amount of each beneficiary’s interests in the same bank up to $250,000 per beneficiary. For example, the terms of a living trust account with a balance of $2 million provide for $100,000 for each of the account owner’s four children, $500,000 to charity, $50,000 to a friend, and the remainder to the owner’s husband. The total trust account has a balance exceeding $1,250,000 and more than five beneficiaries. Assuming the beneficiaries are not beneficiaries of any other trust account at this bank, each beneficiary’s interest will be insured up to a maximum of $250,000 (but no more than their actual interest). As such, the account owner’s four children and the owner’s friend will be insured for the full amount of their interests, while the charity’s and husband’s interests ($500,000 and $1,050,000, respectively) will be capped at $250,000 each, making the sum of their aggregate amounts $950,000. As $1,250,000 is the greater of the two amounts, the account will be insured for $1,250,000.

Irrevocable Trust Accounts

Similarly to revocable trust accounts, irrevocable trust accounts are insured separately from the owners’, trustees’, and beneficiaries’ other accounts at the same institution. Non-contingent interests are insured in aggregate up to $250,000 for each beneficiary, while all contingent assets of the trust will be insured in the aggregate up to $250,000. For example, if an irrevocable trust account has three non-contingent beneficiaries and two contingent beneficiaries, the maximum protection available on the account is $1,000,000 ($250,000 for each of the non-contingent beneficiaries and $250,000 total for the two contingent beneficiaries).

As demonstrated in the above examples, trust accounts offer protections that far surpass the $250,000 per depositor maximum. Moreover, when compared to the number of single ownership accounts it would take to receive comparable protections, trust accounts are by far the more straightforward option. The McDonald Hopkins Trusts and Estates team is available to assist in setting up trusts and will work with you to help maximum your FDIC protections. If this is something that appeals to you, you can reach out to one of our attorneys for a consultation.