Listen to Lawrence…FDIC – Irrevocable Trusts

July 24, 2020

Dear clients and friends,


This LISTEN TO LAWRENCE installment introduces the fourth category of separate FDIC insurance, the IRREVOCABLE TRUST account, at an insured bank. Remember, this insurance is in addition to the insurance you get from each of the other categories and these same rules apply to accounts in credit unions.


Hi Lawrence. I really appreciate these emails. You did an irrevocable Medicaid Trust for me several years ago. I have a money market and a CD in my trust totaling $326,000. I have my two kids as beneficiaries of the trust. Is the account fully insured?


Irrevocable Trusts can be created by a court or by statute, but in our office, they are created for our clients by a formal trust agreement. The usual purpose of these formal trust agreements is to reduce estate taxes or protect assets from being depleted by long term care costs, like home care or a nursing home. The latter was what the client above wanted to accomplish when they created an irrevocable Medicaid Trust.

I will start with the answer. The trust will be limited to $250,000 of insurance. Therefore, the trustee should deposit the excess ($326,000 – $250,000 = $76,000) in another bank to get full coverage.

It is possible for an irrevocable trust account at one bank to receive up to $250,000 per beneficiary but this will be a rare trust. It all comes down to whether or not a beneficiary’s interest is “contingent” or not. If it is “non-contingent,” the insurance can be increased up to $250,000 per beneficiary. However, if it is “contingent,” all contingent interests are added together and insured up to a maximum of $250,000, regardless of the number of beneficiaries. When the funds in a single irrevocable trust account represent both contingent interests and non-contingent interests, the FDIC will separate the two types of funds before applying the rules above.

To be “non-contingent” you have to ask if the beneficiary’s share is guaranteed and ascertainable?

Here are some examples of “contingent” interests:

If the trustee has the right to spend the money on the beneficiary (or other beneficiaries) before they are supposed to receive it all, then we have no way of knowing how much they will get in the end. The amount they receive is contingent on the discretion of the trustee. For example, if the trustee can use the money for the health, education, maintenance or support of the beneficiary, it will be considered contingent.

If the trust grantor has the right to change the amount a beneficiary will receive, then again, it is contingent. The amount they receive is contingent on the discretion of the grantor.

If the trust terms state that the beneficiary has to do something to get the money, it will be considered contingent. An example of this is when they get the money only if they attend college. The amount they receive is contingent on the action or inaction of the beneficiary.

Since practically every irrevocable trust we write contains some contingency, $250,000 will be the insurance limit. In particular, our Medicaid Trusts allow lifetime distributions to the beneficiaries and allow the grantors to change beneficiaries. Therefore, all of our Medicaid trusts are limited to $250,000 of insurance per bank (or credit union).


As an aside, any funds representing a grantor’s “retained interest” are insured to the grantor in the single account category (which must be added to other accounts in this category for a total of $250,000 of insurance). If the irrevocable trust provides that the trustee can return assets to the grantor, then to such extent, this amount will be considered a “retained interest.” You will never see this in one of our Medicaid Trusts but it can come up in some of our estate tax-saving trusts. If you have an irrevocable trust with us where you have a retained interest, you may wish to analyze the extent of your insurance coverage. Of course, any amount in the trust in excess of the retained interest will be insured in the irrevocable trust category as described above.

I hope this helps.

Please forward this information to your friends and relatives.

As always, please send me your questions. If you are thinking about it, others are probably too, so my answers will no doubt help you and many others.

Let’s stay connected.


Stay safe!