In January 2022, the Federal Deposit Insurance Corporation (commonly known as the FDIC) approved a final rule to revise its insurance coverage for accounts owned by trusts. The final rule, which takes effect on April 1, 2024, will simplify deposit insurance coverage for deposits held in accounts owned by both revocable and irrevocable trusts.
Current FDIC Rule
Currently, revocable and irrevocable trusts are each subject to their own sets of rules and amounts of insurance coverage. In the event of an insured depository institution’s failure, determination of insurance coverage under the current rule requires time-consuming review and detailed scrutiny of the governing trust agreement to assess nuances including the number, type and interest of each beneficiary and further categorization of the type of trust.
New FDIC Rule
However, under the new rule, both irrevocable and revocable trusts will be governed by a simpler, shared calculation to determine coverage simply based on the number of trust beneficiaries.
Under the new rule, deposit amounts in accounts owned by revocable and irrevocable trusts will be insured for an amount up to $250,000 per trust beneficiary, up to a maximum of five beneficiaries. Under this new calculation for trust deposits, the maximum amount of deposit insurance coverage is $1,250,000 per account owner, per insured depository institution.
Unlike the current rules, the calculation of insurance coverage under the new rule will not require evaluation of the contingent or non-contingent status of beneficiaries or the percentage of interest each beneficiary has in the trust.
For example, under the new rules, if an account was titled in the name of a trust that had three beneficiaries, with one beneficiary allocated an interest in 10% of the total trust assets and the remaining two each allocated a 45% interest, such a trust account would be insured by the FDIC for an amount equal to $750,000 despite the disproportionate interests of each beneficiary.
Fortunately, despite the overhaul in governing principles in the new rule, the FDIC anticipates that very few trust depositors will experience any change in insurance coverage for such accounts once the final rule takes effect.
Benefits of New Rule
An important benefit of the updated rule is the amount of time it is likely to save financial institutions and depositors. The analysis required to calculate insurance coverage for deposits in trust accounts has been immensely simplified by the final rule, which in turn will allow for more efficient deposit insurance determinations for trust accounts in the event of an insured depository institution’s failure.
The straightforward method of computing coverage will also eliminate the institutions’ time-consuming review and analysis of trust agreements that is essential for compliance with the current rules.
The FDIC currently receives more inquiries concerning deposit insurance coverage for trust deposits than for all other types of deposits combined. Starting in 2024, this new streamlined rule should provide a welcomed sense of certainty and clarity for bankers and depositors alike. Contact your Warner attorney or Nina Lucido at 586.303.4120 with any questions about this new rule.