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July 1, 2024 / Newsletters, Publications

New FDIC Rules Affecting Insurance Limits on Trust Account Deposits

by Corinne L. Adams

The Federal Deposit Insurance Corporation (“FDIC”) recently adopted changes to the deposit insurance rules for revocable and irrevocable trust accounts which take effect on April 1, 2024.  The prior regulations applied separate sets of complex rules to revocable and irrevocable trust deposits and involved different coverage criteria and formulas for calculating coverage which caused considerable confusion.  The new rules were adopted to help simplify and streamline their application.  These rules apply not only to accounts that are titled in the name of a trust, but also to other accounts that are considered “informal” trust accounts, such as “payable-on-death” accounts and accounts held “in trust for” one or more beneficiaries.

Under the new rules, a grantor’s trust accounts will be insured in an amount equal to $250,000 per institution, per trust beneficiary, not to exceed five beneficiaries (or $1,250,000), regardless of whether the trust is revocable or irrevocable. Also, all of the grantor’s trust accounts at a financial institution will be combined to determine the maximum amount of coverage allowed.

Example: Jack, as grantor, creates a revocable trust wherein he, as the lifetime beneficiary, is entitled to distributions from the trust during his lifetime and Jack’s two children, as the remainder beneficiaries, are entitled to receive distributions from the trust upon Jack’s death. Jack then deposits $1,000,000 in a bank in the name of the revocable trust. The maximum deposit amount covered by FDIC insurance would be $750,000 ($250,000 x one grantor x three beneficiaries for each of Jack and his two children). If, subsequent to creating the revocable trust, Jack creates an irrevocable trust for the benefit of his three grandchildren and deposits another $1,000,000 at the same bank, Jack’s trust account deposits at this bank would be insured up to $1,250,000 ($250,000 x five beneficiaries), even though there are six primary beneficiaries as between both trusts.

In situations where deposits are held in connection with a joint trust, the interests of each living grantor are separately insured, which has the effect of doubling the coverage limits.

Example: Jack and Jill, as grantors, create a joint revocable trust for the benefit of (i) the two of them during their joint lifetimes, followed by the survivor of them, and (ii) their two children after their deaths. The maximum deposit amount covered by FDIC insurance would be $2,000,000 ($250,000 x two grantors x four beneficiaries for each of Jack, Jill, and their two children). In this example, the Jack and Jill are considered life estate beneficiaries and the two children are remainder beneficiaries, both of which are eligible beneficiaries under the FDIC rules.

In sum, the new rules effectively limit coverage for a grantor’s deposits at each institution to $1,250,000 for a single grantor trust and $2,500,000 for a trust with two grantors, where there are five or more beneficiaries of the trust(s). While the new rules aim to simplify the calculation as to the amount of insurance coverage for trust account deposits, they may serve to reduce coverage for depositors with large balances. For this reason, clients should become familiar with the new rules and reevaluate their trust account arrangements at each financial institution to ensure that funds deposited in all of their trust accounts are protected in the event of a bank failure.

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