New FDIC Regulations May Affect How Your Trust is Insured

Entrance to The Federal Deposit Insurance Corporation (FDIC) in Washington DC.

Trusts are a popular estate planning tool for many families because of the protections they provide. Depending on the type of trust, those protections may be against taxes, creditors, or even beneficiaries’ impulsive spending. But how are the assets in the trust itself protected? If they are in a bank account, the answer is that they are protected by the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent agency that was created by the U.S. Congress to increase consumer confidence in the nation’s financial system and maintain the system’s stability. FDIC insures deposit accounts, including those for trusts, but FDIC rules and regulations regarding insurance for trust accounts are changing. If you have a trust, you need to be aware of the new FDIC regulations.

Depending on the complexity of your estate plan, you may have multiple trusts and significant amounts of assets, perhaps in a single deposit account. If that’s the case, you might wonder if your trust assets are fully insured. The new FDIC trust rules simplify matters so it’s easier to understand how trust assets are protected.

The FDIC issued its new rules on January 21, 2022, but they will not take effect until April 1, 2024.

New FDIC Rules and Regulations Regarding Trust Deposits

Under the existing FDIC regulations, there were different categories for revocable trusts and irrevocable trusts. With the updated rules, those categories are merged. The FDIC has also introduced a simpler approach to determining the extent of insurance coverage. Also under the current rules, interests in a trust were treated differently based on whether they were fixed or contingent (remainder) interests. The updated rules no longer make that distinction.

The delay between the enactment of the new rules and their implementation gives individuals and their estate planners time to make any necessary adjustments to their trusts. However, most grantors (creators) of smaller trusts will probably find that they prefer the simplicity of the new rules.

So, what do those rules look like? Essentially, each grantor’s trust deposits at an institution will be insured up to a maximum amount of $250,000, multiplied by the number of beneficiaries of the trust, up to five beneficiaries. That limits coverage at each institution to $1,250,000 for a single grantor trust and $2,500,000 for a joint trust for the maximum five beneficiaries.

Comparing Old and New FDIC Trust Insurance Rules

Let’s say that Anne has $200,000 on deposit with XYZ bank in a revocable living trust for which she is the sole grantor. Upon Anne’s death, her son, Bob, is the sole beneficiary of the trust. Under the current rules, the FDIC insures up to $250,000 per institution and per beneficiary. The rule considers what are referred to as “primary” beneficiaries of the trust, or those who will receive trust assets on the grantor’s death. Bob is a primary beneficiary, and the trust assets are less than $250,000; they are fully insured. If the trust assets totaled $500,000, only $250,000 would be protected, unless Anne placed the remaining $250,000 on deposit at another bank. If Anne had five children as primary beneficiaries, her revocable trust funds on deposit at XYZ Bank could total $1,250,000 and still be insured.

What if Anne’s trust was irrevocable under the current rules? As long as all beneficiaries are not contingent and can be identified, FDIC insurance works the same as with a revocable trust. If some beneficial interests were contingent, however, all of those interests would be lumped together and insured up to a maximum of $250,000. Using Anne’s example, Bob remains the primary beneficiary, and his four children are contingent beneficiaries. Trust funds on deposit with the bank would be insured up to $500,000: $250,000 for Bob’s beneficial interest, and $250,000 for all of the contingent beneficiaries’ interests, although there are four of them.

Under the new FDIC regulations, it doesn’t matter whether the trust is revocable or irrevocable, or the beneficiaries’ interests are fixed (non-contingent) or contingent. FDIC coverage for trust funds on deposit is limited to $250,000 per institution, per beneficiary, up to a maximum of five beneficiaries and $1,250,000 for a single grantor trust and $2,500,000 for a joint trust.

Preparing for the Changes in FDIC Regulations Regarding Trusts

It will be well over a year before the changes to FDIC rules and regulations take effect, but there’s no time like the present to begin preparing. If you have questions about how the new FDIC regulations will affect insurance of your trust, we invite you to contact Estate Planning & Elder Law Services to schedule a consultation.