Ally Bank recently launched a resource guide about the advantages of trust accounts and steps for establishing trust accounts. In Ally’s resource guide, it describes how Ally customers can set up a trust account. This refers to a formal trust account which is different than an informal trust which can be set up by designating POD or ITF beneficiaries on your bank account. A formal trust account requires that you first establish a legal trust agreement which is usually done with the assistance of an attorney. Once this is done, banks can then open a trust account. In the case of Ally Bank, you have to fill out a trust account application and mail in required documents.
An overview of why you would want a formal trust account is described in In the questions section of the Ally’s trust resource guide:
A trust can be a useful financial planning tool to help you (the grantor) ensure your assets are protected and that your beneficiaries are cared for in the future. A trust can also help you reduce estate taxes and avoid probate (the sometimes long and complicated process of settling an estate). An attorney can help you obtain a legal trust agreement and name the trustee, who is the person who will manage the trust once it has been established. Then an Ally account can be opened for the trust.
We have more details in the our article, What You Need to Know About Revocable Living Trusts.
Formal revocable trusts are similar to informal revocable trusts in terms of FDIC deposit insurance coverage. This can be useful if you want to insure over $250,000 at one bank. I described how this can be easily done in my post Maximizing Your FDIC Coverage with Beneficiaries.
For informal revocable trusts, payable-on-death (POD) or similar terms must be in the account title, and beneficiaries must be identified in the bank’s deposit account records. For formal revocable trusts, the account must be titled in the name of the formal trust, and the beneficiaries must be identified in the trust agreement.
Details of FDIC deposit insurance of revocable trust accounts can be found starting on page 31 of the FDIC Comprehensive Seminar on Deposit Insurance Coverage For Bankers.
For irrevocable trust accounts, the term irrevocable means that the grantor (person who created the trust) does not possess the power to terminate or revoke the trust. According to page 70 of the FDIC document, “insurance coverage for irrevocable trust deposits is usually no more than $250,000”.