2022 Updates: FDIC Insurance for Trusts

If you have ever walked into a bank, you may have noticed signage that indicates that each depositor is insured to a certain amount by the Federal Deposit Insurance Corporation (FDIC). It’s likely that you’ve never given those signs—or the FDIC—much thought, but they are the reason you can bank with confidence that your money will be there when you need it. The FDIC protects deposit accounts in the United States, including insuring deposit accounts for trusts.

What is FDIC Insurance for Trust Accounts?

President Franklin D. Roosevelt signed the Banking Act of 1933, which created the Federal Deposit Insurance Corporation. During the Great Depression, the federal government wanted to shore up the stability of the country’s financial system and increase consumer confidence in that system. Whenever a deposit account is opened at an FDIC-insured financial institution, the depositor is automatically covered. In the event of a bank failure, the FDIC ensures that depositors have ready access to their funds.

Deposit accounts include Certificates of Deposit (CDs). Money Market Deposit Accounts (MMDAs), checking accounts and savings accounts, including those for trusts. If you have created a trust to protect assets for your own future or for your family or other beneficiaries and the trust has a savings or checking account, that account is insured by the FDIC. However, the rules regarding FDIC insurance are changing, so it’s important to understand how your trust could be affected.

What is Changing Regarding FDIC Insurance and Trust Accounts?

The FDIC issued new rules regarding trust deposits on January 21, 2022. However, those rules will not go into effect until April 1, 2024. That gives you time to plan if you need to take action. In general, the rule changes should simplify insurance of trust deposits for most people. One goal of the changes is to provide both depositors and bankers with easy-to-understand rules for trust deposit insurance coverage.

Under the law that is currently in effect, there are separate sets of rules that apply to the FDIC coverage of revocable trusts and irrevocable trusts. The various rules have their own criteria for insurance coverage and how that coverage should be calculated. Whether the interests of the trust beneficiaries were fixed or contingent also affects coverage. As you can imagine, that gets very confusing, especially when an estate includes multiple trusts or types of trusts. FDIC deposit insurance specialists receive more than 20,000 inquiries per year on deposit insurance, and more than half of those have to do with deposit insurance coverage for trust accounts.

Under the new law that is to take effect in 2023, the same rules will apply to both revocable and irrevocable trusts, regardless of whether beneficiaries’ interests are contingent or fixed. According to the FDIC, the formula that will be used for determining coverage is straightforward and familiar to financial professionals; it is currently used for revocable trusts.

FDIC Insurance for Revocable Trusts and Irrevocable Trusts

The new simplified rules provide that FDIC coverage for trust funds on deposit are limited to $250,000 per institution, per beneficiary, up to a maximum of five beneficiaries. The coverage limit for a single grantor trust with five beneficiaries would be $1,250,000; a joint trust with the same number of beneficiaries would have coverage limits of $2,500,000.

For example, let’s say that Bob created a trust, making his son Doug the beneficiary during his lifetime and Doug’s three children, Andrew, Billy, and Christa, beneficiaries after Doug’s death. Trust funds of up to $1,000,000 on deposit with XYZ Bank would be covered by FDIC insurance because there are four beneficiaries. It doesn’t matter that Doug is considered the primary beneficiary of the trust or that Andrew, Billy, and Christa are contingent beneficiaries. It also doesn’t matter whether Bob made the trust revocable or irrevocable.

What if Bob wanted to put more than $1,000,000 in the trust and have it protected by FDIC insurance? He and his wife Anne could create a joint trust with both of them as grantors; the trust’s accounts at XYZ Bank would then be covered up to $2,000,000 ($250,000 times each of the four beneficiaries for each of the two grantors). If a joint trust was not an option, Bob could simply put funds in excess of the covered $1,000,000 into a deposit account at a different bank.

Hopefully, the simplification of the rules regarding FDIC insurance on trust accounts will make it easier for people to understand whether their trust deposits are adequately covered.

What the New FDIC Rule for Trust Accounts Mean for You

Many grantors of trusts will find that the new FDIC rules will not negatively affect their coverage. However, if you have concerns, now is the time to speak with your estate planning attorney. There may be relatively simple measures that you can take to ensure that all your trust deposits are fully protected by the FDIC.

If you have questions about how much FDIC insurance there is on a trust account, FDIC insurance for revocable or irrevocable trusts, or other issues related to the rule changes, please contact Gudorf Law Group to schedule a consultation.