Starting April 1, 2024, the Federal Deposit Insurance Corporation (FDIC) has implemented a new rule for trust account insurance coverage. This rule, originally passed in January 2022, consolidates insurance coverage for different types of trust accounts into a single category called “Trust Accounts.”
Key Changes to Trust Account Coverage
Consolidation of Trust Categories
- The FDIC has merged irrevocable trust accounts (§330.13) and revocable trust accounts (§330.10) into a single category called “Trust Accounts”
- This new trust account category will include formal revocable trusts (§330.10); informal revocable trusts (e.g., POD/ITF accounts from 330.10); and irrevocable trusts (§330.13)
Insurance Coverage Details
- Each trust owner is now insured up to $250,000 per eligible primary beneficiary, with a maximum of five beneficiaries
- An eligible beneficiary can be any living person or an IRS-recognized charity/non-profit
- Only “primary” (not contingent) beneficiaries count toward the insurance coverage
The maximum number of five beneficiaries is the biggest change as shown below:
Implication of the FDIC’s New Rule
The FDIC claims that this new rule simplifies the calculation of insurance coverage. However, it introduces a significant change by limiting the number of insured beneficiaries to five, affecting those with more than $1.25 million in trust assets.
Potential Motivations and Consequences
Ultimately, this change aims to reduce the FDIC’s insurance coverage liability, possibly due to the Deposit Insurance Fund being below regulatory minimums as a percentage of insured deposits. As a result, bank executives will face challenges as trust attorneys, estate planners and financial advisors may need to spread trust accounts across multiple banks to ensure deposit balances remain federally insured.
READ MORE: Regulatory Risk & Compliance in Financial Services
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