Almost every funded credit institution has one or more bank accounts—checking, savings, money market, or certificates of deposit—and most of those accounts are insured by the Federal Deposit Insurance Corporation (FDIC). What many people don’t realize is that regulations regarding the amount of credit accounts covered by FDIC insurance are calculated differently than those for individual account holders. Now, the FDIC has issued new regulations, effective April 1, 2024, on how insured amounts are calculated. These changes make it easier to calculate what is insured and what is not, but will still require some adjustment in the amount held in trusts.
Currently, FID treats revocable and irrevocable trusts differently. Revocable Trusts (which include informal trust accounts such as POD accounts or ATF trust accounts) are insured for up to $250,000 per unique beneficiary with a maximum of five beneficiaries, provided that: 1) The address of the bank account stating that the account is for the trust; 2) Each recipient is named in the correct place. and 3) each beneficiary must be a living person or a charitable or non-profit organization. So, if a revocable trust account has only one beneficiary, the insurance limit is $250,000, and if the revocable trust has five or more beneficiaries, the insurance limit totals $1,250,000.
Irrevocable trust accounts are usually only insured with up to $250,000 in all deposits added together for each beneficiary. To qualify, an irrevocable trust must be: 1) a valid trust under state law; 2) The purpose of the trust has been disclosed to the bank. and 3) the amount payable to the beneficiary cannot be conditional (ie the beneficiary survives until a certain date). Since most Irrevocable Trusts have current and potential beneficiaries, they fail to meet all four tests and are therefore limited to a total insurance coverage of $250,000 in each Vic Bank Insured.
The result is that most trust accounts, whether cancelable or non-cancellable, are limited to $250,000 per FDIC-insured bank.
The FDIC’s final regulations, effective April 1, 2024, will change how bank accounts held in the name of a trust are insured. This rule change treats revocable and irrevocable trusts in the same way to define lock limits. And soon, accounts held by the FDIC may be insured for up to $1,250,000, instead of the $250,000 maximum for individual accounts.
Under the new rules, irrevocable and irrevocable trusts are treated the same way — funds are insured for up to $250,000 per beneficiary per FDIC-insured bank. Total insured is limited to five beneficiaries, or $1,250,000, but all donors are also covered up to $250,000. Here are some examples of how this works.
Pope set up a revocable trust, as the grantor, stipulating that upon his death, the trusts would go to his two children and, if they died before him, to his five grandchildren. Bob puts $750,000 into a bank account in the name of the Revocable Trust. The maximum insured amount is $500,000 ($250,000 x two children) but if his children die before Bob, the maximum insured is $1,250,000 ($250,000 x five grandchildren).
For mutual trusts, the interest of both donors is insured, so if John and Jane set up a mutual trust with both of them as donors, and their three children are the beneficiaries, the amount insured is $1,500,000 ($250,000 x donors x three beneficiaries).
So, between now and April 1, 2024, if you have accounts at a FDIC-insured bank in the name of a trust, you should review the amount held in each bank and the amounts that will be insured for each grantor and recipient.