FDIC Changes Deposit Insurance Rules for Trust Accounts

On January 21, 2022, the Federal Deposit Insurance Corporation (FDIC) adopted changes to the deposit insurance rules for revocable and irrevocable trust accounts. The new trust account rules will take effect on April 1, 2024. In light of the recent events in the banking sector, many have become increasingly concerned about deposit insurance coverage. Although the new rules simplify the insurance coverage calculation for trust accounts, the rules may reduce coverage for some depositors with large balances. Accordingly, you should review the rule changes and, if necessary, adjust your trust account arrangements prior to April 1, 2024 so that the funds will be protected in the event of a bank failure.

The new rules are intended to make it easier to calculate insurance coverage for trust accounts. Under the existing regulations, separate and distinct sets of rules apply to revocable trust deposits and irrevocable trust deposits. These sets of rules establish different coverage criteria and formulas for calculating coverage, which has led to much confusion. The new rules address this issue by combining revocable trust accounts and irrevocable trust accounts into a single “trust accounts” category.1

Under the new rules, a grantor’s trust accounts will be insured in an amount equal to $250,000 per institution, per beneficiary,2 not to exceed five beneficiaries. (A grantor is a person who creates a trust.) Thus, the maximum coverage for a grantor’s trust deposits at a financial institution is $1,250,000. Importantly, when applying this formula, a grantor’s trust deposits at a financial institution3 are aggregated, regardless of whether those deposits are held in connection with a revocable trust or an irrevocable trust. Additionally, when determining the total number of beneficiaries, the grantor (or grantors, in the case of a joint trust) are ignored, and only the primary beneficiaries are counted. The contingent beneficiaries, or those who would only obtain an interest in the trust if one or more of the primary beneficiaries are deceased, are not counted.

As a simple example, suppose John Doe establishes a revocable trust, and the trust instrument provides for the distribution of all trust assets, upon John’s death, to his three children, in equal shares. The trust instrument also specifies that if any of his children predecease him, then such child’s share will be distributed equally among such child’s children. John has five grandchildren. If John opens a trust account at BigBank and deposits $800,000, only $750,000 ($250,000 x 3 beneficiaries) would be covered by FDIC insurance because there are only three primary beneficiaries (John’s children). If, however, John subsequently establishes an irrevocable trust for the benefit of his grandchildren and opens a separate trust account for the irrevocable trust at BigBank, then John’s BigBank trust account deposits would be fully insured up to $1,250,000 ($250,000 x 5 beneficiaries). Although there would be a total of eight primary beneficiaries, only five of those beneficiaries can be counted for the deposit insurance calculation under the new rules.

When deposits are held in connection with a joint trust, the interests of each living grantor are separately insured and, as such, the coverage limits discussed above are effectively doubled.4 To illustrate, suppose John and Jane Doe establish a joint revocable trust, and the trust instrument provides for the distribution of all trust assets, upon the death of the survivor of John and Jane, to their three children, in equal shares. If John and Jane open a joint trust account at GiantBank and deposit $1,400,000, all of the funds would be covered by FDIC insurance. Indeed, the account would be fully insured up to $1,500,000 ($250,000 x 2 grantors x 3 beneficiaries). After John passes away, the FDIC would continue to insure the account as if John were still alive for a period of six months, and then upon the expiration of the six‑month grace period, the account would only be insured up to $750,000 ($250,000 x 1 grantor x 3 beneficiaries).5

Although the FDIC expects coverage levels for most trust depositors to be unaffected by the new rules, we encourage you to review your trust account arrangements before the new rules take effect on April 1, 2024. If you have any questions about the rule changes, please contact a member of the Firm’s Estate Planning Department.

1 Please note, however, that accounts held by an insured depository institution as trustee of an irrevocable trust will continue to be recognized as a separate category.

2 The new rules clarify that “[i]f a trust agreement provides that trust funds will pass into one or more new trusts upon the death of the grantor(s) . . . the future trust(s) are not treated as beneficiaries of the trust; rather, the future trust(s) are viewed as mechanisms for distributing trust funds, and the beneficiaries are the natural persons or organizations that shall receive the trust funds through the future trusts.”

3 This includes not only accounts that are titled in the name of a trust, but also other accounts that are considered “informal” revocable trust accounts, such as payable-on-death (“P.O.D.”) accounts.

4 The new rules specify that, unless the institution’s deposit account records indicate otherwise, a joint trust account will be presumed to be owned by the grantors in equal shares.

5 It should be noted that the six‑month grace period that applies upon the death of an account owner does not apply to deceased beneficiaries.