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Do You Have a Trust Account? FDIC Insurance Rules on Deposits Just Changed

The FDIC’s new rules on how they will insure Trust account deposits went into effect April 1, 2024. Trust & Will investigates.

Patrick Hicks

Patrick Hicks, @PatrickHicks

Head of Legal, Trust & Will

Depositing money into your bank is a practice grounded in trust—both in the financial institution where your funds are held and the regulatory system designed to guarantee their safety.

On April 1st, the Federal Deposit Insurance Corporation (FDIC) implemented a new set of rules that impact how Trust account deposits are insured. If you own a Trust account through a financial institution, this matter requires your attention. You may need to reassess and potentially reconfigure your financial and estate planning strategies to ensure that your assets are properly protected.

Trust & Will inspects the changes in the FDIC rules and how it may impact high net-worth savers.

What is the FDIC & How Does it Work?

The Federal Deposit Insurance Corporation (FDIC) is an independent U.S. agency that was established in 1933 in response to the thousands of bank failures that took place between the 1920s and 1930s.

Its charge is to maintain public confidence and stability in the national financial system. Key responsibilities of the agency include:

  • Insuring bank deposits made by Americans to their respective financial institutions

  • Examining and supervising financial institutions for safety and soundness

  • Managing receiverships

Deposit insurance from the FDIC protects American consumers by covering the balance of their deposits (up to the insurance limit) in the event that an FDIC-insured bank or savings institution fails.

For example, you might imagine the shockwaves that were created in 2023 when the Silicon Valley Bank suddenly collapsed, freezing the tech industry in its tracks. This is a recent example of when the FDIC would step in and help protect bank depositors, but only up to the insured amount.

Currently, the standard insurance amount is $250,000 per depositor, per insured bank, for each type of account. This means that if a bank were to fail, the FDIC would return the insured deposits to the account holders, up to the coverage limit, typically within a few days of the bank's closing.

Revamped Trust Account Coverage

On April 1st, the FDIC implemented changes to the rules on how it insures deposits made to Trust accounts.

An announcement regarding the changes was originally made in 2022, giving savers and institutions two years to prepare for the change.

The new rule was designed to "simplify" insurance rules for deposits made into all types of Trust accounts. Here are some notes provided by the FDIC regarding the rule changes:

  • To streamline the understanding of deposit insurance coverage for both depositors and financial institutions, the FDIC has replaced the previously separate rules for Revocable and Irrevocable Trusts with a single, simplified rule. This change is intended to ensure consistency and clarity in how deposit insurance coverage is determined for all types of Trust accounts.

  • Deposits held in Trust accounts will now be insured by the FDIC up to a limit of $250,000 per Beneficiary, with a maximum coverage for up to five beneficiaries per depositor. This applies regardless of the Trust being revocable or irrevocable, without consideration for any contingencies or how funds are distributed among the beneficiaries.

  • This allows for a maximum coverage of $1,250,000 per depositor, at each FDIC-insured bank, across all Trust accounts.

  • This change aims to speed up the process of deposit insurance determinations for Trust accounts if a bank fails. The former review process was intricate and time-intensive, and by simplifying it, determinations can be made more quickly in times of need.

FDIC New Insurance Rules for Trust Deposits — Are You Impacted?

If you have bank deposits that are totaling $250,000 or less, then you are not impacted by these changes. However, higher net-worth individuals are advised to assess how these rules may impact their accounts, and later, their named Beneficiaries.

According to CNBC, Trust deposits are now limited to $1.25 million per Trust owner, per financial institution. Further, Beneficiaries are insured for up to $250,000, for up to five beneficiaries. The coverage limit is set at $1.25 million even if you have more than five beneficiaries.

If you have or had assets that exceed this $1.25 million mark, then you should be on alert that these changes have been made. For example, you may have reductions in insurance coverage for certain investments that were previously there. This is particularly troublesome if you have assets that are frozen for a set period of time, such as certificates of deposit.

Mentioned earlier, the FDIC is now treating all types of Trust accounts as one. Let's say that you previously deposited $250,000 in a Revocable Trust and another $250,000 in an irrevocable Trust. Before the rule change, your FDIC coverage would have been $500,000, as they were treating different types of Trusts separately. Today, however, your coverage is reduced to $250,000.

On the other hand, the requirements for Payable on Death (POD) accounts have loosened. These accounts are also known as informal Revocable Trusts. Before, these accounts had to be titled with the phrase "payable on death" to benefit from Trust coverage limits. The FDIC no longer requires this. Banks now just have to maintain records to identify Beneficiaries in order for POD accounts to receive Trust treatment.

Strategies that may Help with the Changes

If you want to have deposit insurance over the amount of $250,000 then you may need to make some changes.

According to financial experts on CNBC, here are some strategies you can consider:

  1. Open accounts at more than one FDIC-insured bank

  2. Open a joint account for two individuals, thus bringing up your coverage total to $500,000

  3. Open different types of accounts, such as a single and joint account, etc., to take advantage of FDIC coverage.

As always, be sure to consult your financial professional to navigate the best path moving forward. They can evaluate your current structures and make recommendations that will help your assets acquire the maximum FDIC coverage possible.

These changes also may impact your estate planning, specifically in relation to Trust accounts and Beneficiaries, and the way the Trust(s) is set up to divide assets. Be sure to also consult your estate planning professional in the process.

While it may feel unlikely right now that your chosen financial institution would encounter any issues, time and again we have seen examples where our economy at large, as well as individual institutions, are more fragile than we think. For most individuals, entrusting our money at the bank is the most practical option, but we also need to make sure that the assets we're entrusting have as much coverage as possible.

If the new policy changes leave you or your designated Beneficiaries vulnerable, then it's time to strategize and make a change.

Staying Informed and Proactive is the Key to Effective Financial and Estate Planning

Navigating the financial regulatory landscape can be tricky, but understanding your financial rights and protections (such as what is provided by the FDIC), as well as staying on top of changes will empower you to protect your assets on an on-going basis. Unfortunately, financial planning and estate planning are not "set it and forget it" exercises. Rather, your strategies should be flexible, ready to get upgraded when necessary.

However, this doesn't mean that you need to navigate all this alone. We highly recommend creating a team of financial and legal experts that you can consult. They'll help you maintain a clear understanding of these landscapes (financial and legal), as well as devise strategies that adapt to any new challenges or hurdles that come up.

The recent changes to the FDIC insurance rules highlight how we need to continue reshaping our strategy to meet current standards. Leaning into a proactive mindset will help you elevate your financial know-how and well-being.

As always, Trust & Will is here to support you through these changes with clarity and confidence. We aim to make sure you feel supported and knowledgeable through your estate planning processes. Should you be impacted by this new FDIC rule change and need to update your estate plan, we're here to help you through it. Whether you're a new or existing customer, know that you can lean on the Trust & Will platform to get your legacy and estate planning strategy in place. Learn more about our Trust-based estate plans and all it has to offer today.

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