Understanding the New FDIC Insurance Rules for Trust Accounts
If you own a bank account held by a trust, the Federal Deposit Insurance Corp. (FDIC) has made a significant change that could impact your finances. Starting April 1, 2024, the FDIC will implement new, easier-to-understand insurance limits for bank accounts held by both revocable and irrevocable trusts. This change aims to reduce confusion about FDIC coverage for these types of accounts.
What Is FDIC Insurance?
FDIC insurance protects eligible deposits up to $250,000 per depositor, per insured bank, for each account category when an insured bank fails. This includes bank accounts held by revocable trusts and irrevocable trusts.
Trusts are commonly used for estate planning purposes. They are funds that hold property or other assets for a person, a group of people, or an organization. The two primary types of trusts are:
- Revocable Trust: Also known as a living trust, the owner maintains control of the account’s assets throughout their life. The owner, known as the grantor, can alter or cancel the trust whenever they want.
- Irrevocable Trust: Unlike a revocable trust, the owner of an irrevocable trust no longer controls the fund’s assets once the trust has been set up. Altering or canceling an irrevocable trust is complicated.
Current Rules for FDIC Insurance on Trust Accounts
Until this year, the rules for FDIC coverage of trust accounts were confusing. The FDIC enforced one set of rules for revocable trusts and another set of rules for irrevocable trusts, each with its own coverage criteria and calculation methods.
The FDIC reported in 2022 that it had responded to about 20,000 “complex” inquiries about deposit insurance per year over the past 13 years. More than half of those inquiries were related to deposit insurance for revocable trusts and irrevocable trusts.
Under the old rules, FDIC coverage for revocable and irrevocable trusts isn’t calculated the same way:
- Revocable Trusts: FDIC coverage depends mostly on how many primary beneficiaries have been designated. For example, the coverage limit for one beneficiary is $250,000. The formula for figuring out coverage limits is pretty straightforward.
- Irrevocable Trusts: The coverage calculation involves determining whether the beneficiaries’ interests are contingent on anything other than survival. All contingent interests are collectively insured up to $250,000, no matter how many contingent beneficiaries there are. As such, a contingent trust might only be insured up to $250,000, even if there are multiple beneficiaries.
New Rules for FDIC Insurance on Trust Accounts
The key parts of the new rule for FDIC coverage of trust accounts are:
- Revocable trusts and irrevocable trusts now belong to a single FDIC category instead of separate categories. This category also includes “payable on death” (POD) accounts or “in trust for” (ITF) accounts, even if a formal trust hasn’t been created.
- Insurance calculations for revocable and irrevocable trusts have been simplified.
- Each trust owner is insured up to $250,000 for each eligible primary beneficiary, with a maximum of five beneficiaries (and a total of $1.25 million). This limit applies to both revocable and irrevocable trusts.
New FDIC Insurance Coverage for Trust Accounts, Single Owner
| Number of Beneficiaries | FDIC Insurance Limit |
|---|---|
| 1 | $250,000 |
| 2 | $500,000 |
| 3 | $750,000 |
| 4 | $1,000,000 |
| 5 | $1,250,000 |
| 5+ | $1,250,000 |
The FDIC notes that if someone holds a revocable trust and irrevocable trust at the same bank, the insurance limit for one owner and at least five eligible beneficiaries is up to $1.25 million per insured bank. As long as the combined balance of the trust accounts is $1.25 million, the FDIC fully insures all the money in this case. But if an account balance exceeds $1.25 million, some of the money might not be insured.
New FDIC Insurance Coverage for Trust Accounts, Two Owners
| Number of Beneficiaries | FDIC Insurance Limit |
|---|---|
| 1 | $500,000 |
| 2 | $1,000,000 |
| 3 | $1,500,000 |
| 4 | $2,000,000 |
| 5+ | $2,500,000 |
If two people own revocable and irrevocable accounts at the same bank and have listed the same beneficiaries, their FDIC coverage limit would be double that of the limit for one account owner. For instance, a combined balance for two trust account owners with four beneficiaries would be insured up to $2 million.
The Bottom Line
Government rules sometimes become more complicated, not less complicated. But in the case of the FDIC, insurance coverage rules for accounts held by revocable and irrevocable trusts have been simplified as of April 1, 2024. As a result, owners of trust accounts may not feel as though they need a law degree or accounting degree to figure out how much of their money is insured by the FDIC.
At O1ne Mortgage, we understand that navigating financial regulations can be challenging. If you have any questions or need assistance with your mortgage needs, don’t hesitate to call us at 213-732-3074. Our team of experts is here to help you every step of the way.
