Key Questions: How Do Recent Changes to the FDIC Insurance Coverage Limits Affect My Deposits?
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Depositors with more than $250,000 in a single account should connect with their institution to check on the insurance status of their deposits, as recent changes to insurance limits have been put into effect.
FDIC General Rules
The Federal Insurance Deposit Corporation, or FDIC, is an independent government agency that protects bank depositors against the loss of their insured deposits in the event that an FDIC-insured bank or savings association fails. FDIC insurance is backed by the full faith and credit of the United States government.
Bank customers don’t need to purchase deposit insurance; it is automatic for any deposit account opened at an FDIC-insured bank. Deposits are insured up to $250,000 per depositor, per FDIC-insured bank, in each account ownership category.
If you have $250,000 or less deposited at a bank, the new changes will not affect you.
How Has FDIC Coverage Changed?
On April 1, 2024, the FDIC adopted a new rule to simplify insurance coverage for beneficiaries of trust accounts. This rule combines revocable and irrevocable trusts into a single ownership category, and under this new trust account category, each trust owner will be insured up to $250,000 per eligible primary beneficiary up to a maximum of five beneficiaries. Regardless of contingencies, allocation of funds, or whether a trust is revocable or irrevocable, this rule could provide up to $1.25MM in deposit insurance.
Before the implementation of this rule, the FDIC employed a complex set of regulations that applied different rules to different types of trusts, resulting in uncertainty amongst bankers, consumers, and other interested parties. One example of this is the FDIC had previously provided $250,000 in insurance to individual beneficiaries on a proportional basis. This could be problematic in determining each beneficiary’s coverage, as it would require deep analysis of individual trust documents to determine each beneficiary’s actual coverage.
The new rule eliminates the need to conduct “contingent” vs. “non-contingent” beneficiary analysis, and the new limits now apply uniformly to the following types of trusts:
- “Formal” revocable trusts (i.e., living trust and family trust agreements)
- “Informal” revocable trusts (i.e., payable-on-death accounts, in-trust-for accounts, or Totten Trust accounts)
- Irrevocable trusts (including revocable trust agreements that become irrevocable upon the grantor’s death)
While this change greatly simplifies the insurance coverage calculation for beneficiaries, certain accounts may see a decrease in total coverage. A single depositor with more than $1.25MM in a bank account titled in the name of a trust with six primary beneficiaries now is limited to up to $1.25MM in insurance to be applied to up to only five of those six beneficiaries. The total coverage on that account may have been higher before the rule change given that previously there was no limit to the number of beneficiaries.
Summary
The new coverage limits associated with the new FDIC rule change are as follows:
- Trust deposits are insured up to $250,000 per beneficiary, regardless of whether a trust is revocable or irrevocable.
- The number of beneficiaries may not exceed five, regardless of the way in which funds are allocated among beneficiaries, regardless of whether the beneficiaries are contingent or non-contingent.
- The maximum insurance is $1,250,000 per owner, per insured financial institution for trust deposits.
- The above numbers are doubled if there are two trust account owners (i.e., each account owner has a revocable and irrevocable trust at the same bank).
What Should You Do?
This new FDIC rule represents a perfect opportunity for clients to review their trust accounts held at deposit institutions, asset titling, and current beneficiary designations as well as their overall current estate plan and/or begin the process of implementing a new wealth management strategy. It is important for clients to make sure they understand how this rule change affects them.