New FDIC Rules Change Coverage For Trust Accounts

In light of recent bank failures, many people are rightfully concerned about the coverage limits of Federal Deposit Insurance Corporation (FDIC) insurance that apply to their bank accounts and want to ensure that their accounts are fully protected. The FDIC generally provides up to $250,000 to each depositor per bank, but the exact calculation depends on the identity of the depositor. For an individual depositor, the FDIC coverage is readily discernible—$250,000. On the other hand, a trust account can potentially receive $1.25 million of coverage per bank if the trust account has multiple beneficiaries, even if established by one individual. Because determining the actual coverage limit is complicated and depends on many factors, the FDIC recently amended the rules governing trust accounts to help simplify and streamline their application.

Amendments Effective April 1, 2024

In January 2022, the FDIC promulgated amendments to the rules governing trust accounts, which will take effect April 1, 2024. The current rules will continue to apply until that effective date. The FDIC intentionally published these rules more than two years before their effective date so that depositors would have time to adjust and ensure their accounts are properly structured to obtain full coverage. The amendments simplify FDIC coverage rules for trust accounts by applying the same straightforward insurance calculation for both revocable and irrevocable trusts and eliminating other complexities associated with trust coverage determinations.

Simplification of Coverage Rules for Trusts

Same Definition of Trusts. The current rules define trusts broadly and apply not only to formal trusts established under a trust agreement, but also to accounts “payable on death” (POD) to or held “in trust for” (ITF) one or more beneficiaries, even if no formal trust has been established. These types of accounts are treated as informal revocable trusts. The amended rules will continue to use this current broad definition of trusts.

Same Coverage Rule for Revocable and Irrevocable Trusts—Maximum of $1.25 Million. The current rules determine the available FDIC coverage differently for revocable and irrevocable trusts. FDIC coverage for revocable trusts (including informal revocable trusts) depends largely on the number of eligible primary beneficiaries. For example, one primary beneficiary equals a limit of $250,000, three primary beneficiaries equals a limit of $750,000. An eligible primary beneficiary generally is any living person or IRS-recognized charity or nonprofit organization that is entitled to an interest in the trust deposits when the owner dies. If the revocable trust has more than five beneficiaries, the coverage can exceed $1.25 million, but the calculation is more complicated. 

For irrevocable trusts, the calculation is more complicated because it also depends on whether the interests of the eligible beneficiaries are contingent on anything other than survival, including whether trust distributions are contingent on the exercise of a trustee’s discretion. For FDIC purposes, all contingent interests in an irrevocable trust are aggregated and insured up to a maximum of $250,000, regardless of the number of contingent beneficiaries. As many irrevocable trusts are fully discretionary, their FDIC coverage is usually limited to $250,000 per bank. 

As of April 1, 2024, the same rules will apply to determine FDIC coverage for both revocable and irrevocable trusts. Under the amendments, all trust deposits can receive a maximum of $1.25 million in FDIC coverage per trust account owner (or $250,000 per eligible beneficiary, up to five beneficiaries) per bank regardless of whether the trust is revocable or irrevocable, whether the beneficial interests are contingent or noncontingent, or how funds are allocated among beneficiaries.

Other Complex Rules Eliminated

The current rules include several complex rules dealing with specific, rarely occurring situations, making rule interpretation and application more difficult. The amendments have simplified or eliminated a number of these rules. 

• Application of FDIC coverage limits to revocable trusts that become irrevocable has been simplified by elimination of the so-called springing trust rule, which applies to irrevocable trusts that arise from revocable trusts upon the death of the revocable trust owner. 

• Under the current rules for informal revocable trusts, bank records must specifically indicate that the account is a POD or an ITF account. Depositors often have difficulty verifying that this designation is reflected properly in the bank records, as it may not appear in the account title or a bank may identify these accounts in a different way. The amended rules eliminate this requirement. The beneficiaries of informal revocable trusts must still be identified in the bank’s records, however.

• Under the current rules, if a trust’s creator (grantor) retains an interest in an irrevocable trust—for example, if the grantor is a beneficiary or the trust otherwise provides that trust assets can be returned to the grantor (such as with a grantor retained annuity trust)—any trust funds representing the grantor’s retained interest are insured to the grantor in aggregation with the grantor’s other single accounts at the same bank, subject to the $250,000 FDIC limit for individuals. Under the amended rules, the grantor’s interest will no longer be aggregated with the grantor’s single accounts or other trust accounts when determining FDIC coverage.

• Where a trust identifies another trust (and not a person) as a beneficiary, the amendments will look through the future recipient trust to identify the eligible beneficiaries of the trust account. Further, where an informal revocable trust is payable upon death to a formal trust, the rules will treat the account as if it is in the name of that recipient’s formal trust.

While the FDIC has simplified the process of determining the limits of coverage, these rules do not take effect until April 1, 2024. The deliberate delay gives account holders time to review their personal and trust accounts, consider coverages and make any appropriate changes. Loeb would be pleased to assist with any coverage determination or other questions as the need arises.