Clients are often concerned about protecting their deposits at financial institutions, especially given recent bank failures. Under the current Federal Deposit Insurance Corporation (“FDIC”) rules, revocable and irrevocable trusts are treated differently for purposes of calculating federal deposit insurance coverage. This difference in treatment led to confusion for many as the FDIC reported that deposit insurance specialists responded to approximately 20,000 complex insurance inquiries per year with over half of those inquiries pertaining to deposit insurance coverage for trust accounts.

Current Rule

For Revocable Trusts (including informal arrangements such as transfer on death accounts) with five or fewer beneficiaries, the depositor is insured in an amount up to the total number of named beneficiaries multiplied by the standard maximum deposit insurance amount (“SMDIA”), currently $250,000. In trusts with more than five beneficiaries, the depositor is insured up to the greater of: (1) five times the SMDIA; or (2) the total of the interests of each beneficiary, with each such interest limited by the SMDIA.

Irrevocable trust deposits required determination of whether the beneficiaries’ interests in the trust are contingent or non-contingent. Funds held for non-contingent trust interests in irrevocable trusts are insured up to $250,000 per beneficiary. Funds held for contingent trust interests in irrevocable trusts are aggregated and insured up to the SMDIA in total ($250,000).

New Rule

In an effort to “simplify” the rules for trusts, the FDIC amended its regulations governing deposit insurance to merge the revocable and irrevocable trust deposit insurance categories into one “trust accounts” category.  The new rule, which was first promulgated in 2022 but is effective April 1, 2024, eliminates the need to consider contingencies established in irrevocable trusts.  Instead, all trust accounts would be calculated using the current rules for Revocable Trusts with five or fewer named beneficiaries. Essentially, the maximum coverage will be $250,000 per beneficiary, up to five beneficiaries, for potential total coverage of $1,250,000 for all revocable and irrevocable trust accounts of the same depositor at the same bank.

The new rule should cause little change for trust depositors with less than $1,250,000. However, the practical effect of the new regulation could be a reduction in coverage for those depositors who have placed more than $1,250,000 per owner in trust deposits at one insured institution.

Thank you Azi Baer for this week’s Tax Tracker!