If Your Bank Trustee Fails, What Happens To Your Trust Account?

A recent post on The Trust Advisor Blog (courtesy of Wills, Trusts & Estates Prof Blog) discusses this regrettably timely question: “What happens to trust accounts held by a bank fiduciary when the bank trustee fails?”

The good news is that no federally insured financial institution with the legal power to operate as a trust company failed in either 2008 or 2009. However, this year five banks with trust assets have been taken over by the FDIC.

700 banks are on the FDIC’s “problem list”.  Although we can guess at the list’s membership, its contents remain secret.  In most instances before a bank is taken over, however, the FDIC issues a cease and desist order, and those are public.  You can search the list of orders here.  (In 2010, one Kentucky bank with a trust department has received a cease and desist order.)

The Trust Advisor Blog summarized the risks and the protections as follows:

When a federally insured fiduciary fails, its trust accounts are currently protected up to $250,000 per qualified beneficiary…While that may scare some advisors whose clients have put millions of dollars in stock or real estate into trust at a weak bank, it may not necessarily be a big deal…That’s because the FDIC insurance limit only applies to products issued by the bank that failed. Certificates of deposit held within the trust account are subject to the $250,000 limit. Stocks and real estate aren’t.

As long as the assets are managed properly and your clients’ trust bank is FDIC-insured…it won’t matter whether it fails or not. The fiduciary assets simply roll over to the financial institution that takes it over….In the worst case scenario…the FDIC will simply liquidate the bank and turn insured cash and other assets back to the outside trustee, who now needs to find a new trust company….Other than perhaps the inconvenience of having to move from one institution to another—which is normally done for you by the FDIC—that’s it….There’s really little if any risk to the beneficiaries as long as the limits are satisfied.

Trust Advisor Blog drily noted, however, that advisors are subject to “some degree of reputation risk” of they refer clients to a bank that fails.  KYEstates readers, if you want to evaluate a bank’s safety, consider these resources at Bankrate.com and Bauer Financial.  Although KYEstates hopes that 2010 is uneventful for banks in general and Kentucky banks in particular, it’s always important to be prudent.