The FDIC establishes limits for insurance on trust accounts. While insurance helps to protect investors and trustees, the FDIC does limit the amount of insurance per account. Keep reading for more information.
What Is FDIC Insurance?
The Federal Insurance Corp. (FDIC) is a government agency that insures deposits at membership banks to protect clients in the event of a bank failure. Insurance from the FDIC is backed by the federal government and covers certain accounts at the bank.
Member banks are institutions that have membership in the FDIC. Most major banks, brick-and-mortar and online- are members of the FDIC but credit unions are not. Credit unions are regulated by the National Credit Union Share Insurance Fund which insures clients as well.
Understanding Trust Accounts
Trust accounts are legal arrangements between grantor and a third party to manage assets on behalf of the beneficiary until they can receive the assets in the account. Living Trusts provide management for assets and ensure that the funds are distributed according to the grantor's wishes under the supervision of a trustee (which is generally the same person as the grantor when it comes to revocable family living trusts). Once the grantor creates a trust, they fund that trust by transferring an account into the name of their trust.
How Does FDIC Insurance Work?
FDIC coverage is generally calculated per bank which means that insurance limits are applied to the total balance of all accounts held by a single depositor at the bank. Accounts at other banks are insured by the FDIC separately.
Under current law, for one or more accounts under one person's name at one financial institution, the account is insured up to $250,000. So, if the account holder's bank were to fail, the FDIC would reimburse them up to $250,000 (only).
For joint accounts owned by two or more people, such accounts are insured based on the share of the account each person owns. In other words, each person on the account is insured for the total amount of the account. So, if the joint account has a balance of $350,000, the FDIC will provide coverage for each person's half of the account up to $250,000. Thus, both “shares” of $175,000 will be covered by FDIC insurance in this example.
Coverage for Trust Accounts
Coverage for trust accounts is much different. Instead of insuring the owner of the account, the FDIC covers each trust beneficiary, to a total limit of $1,250,000. Funds are insured according to the $250,000 per person total. So if the grantor designates a greater percentage of the account to one beneficiary, they may not receive full FDIC coverage if their share exceeds the $250,000 limit. Also, their share must be vested and not contingent.
For accounts with more than five beneficiaries, the aggregate FDIC limit is still (only) $1,250,000 in total. Funds are allocated to the various beneficiaries while the insurance limit is applied separately to each beneficiary's interest. If the interest exceeds the $1,250,000 limit, the excess remains uninsured. But minimum coverage, everything else being equal, will be $1,250,000 for five beneficiaries.
Very importantly however, these rules have been modified by the FDIC earlier this year.
New Rules For FDIC Trust Accounts
You should know that the FDIC has issued a new rule that applies to trust accounts with more than $1,250,000 in the account. According to the new rule, coverage would be reduced for depositors. The FDIC will also combine revocable and irrevocable trust account categories into one insurance category which would mean that the likelihood of account holders exceeding $1,250,000 in total account value is higher.
However, as long as the account has five beneficiaries, the insurance coverage will be $250,000 times five which should cover each share sufficiently. Unless the account has more than the insurance coverage limit, the beneficiaries will have insurance coverage.
Additional considerations from the new rule include:
- A deposit owner's trust deposits will be insured up to $250,000 per beneficiary up to five beneficiaries regardless of the type of trust (revocable or irrevocable) and any contingencies or allocation of funds among the beneficiaries
- The $1,250,000 coverage amount applies to each owner per insured depository institution for trust deposits
- Mortgage servicers' advances of principal and interest funds on behalf of homeowners in a servicing account would be insured up to $250,000 per homeowner consistent with coverage for payments of principal and interest typically collected
- The new rule is intended to facilitate more timely deposit insurance determinations for trust accounts by establishing a consistent formula for calculating deposit insurance coverage overall for all revocable and irrevocable trusts
The new rule will go into effect on April 1, 2024.
Preparing for FDIC Insurance Changes
If you own more than $1,250,000 in trust accounts at an FDIC member bank, you should contact an attorney about your options. At Kaiden Elder Law Group, PC, we understand how important it is to protect your legacy. Our team of dedicated legal professionals can help you navigate the complexities of trust accounts and the new FDIC rule.