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If you own a bank account held by a trust, the Federal Deposit Insurance Corp. (FDIC) has made a change that could affect your money. Easier-to-grasp FDIC insurance limits for bank accounts held by revocable and irrevocable trust accounts take effect April 1, 2024. The goal: Reduce confusion about FDIC coverage for these trust accounts.
What Is FDIC Insurance?
FDIC insurance protects eligible deposits up to $250,000 per depositor, per insured bank for each account category when an insured bank fails. This includes bank accounts held by revocable trusts and irrevocable trusts.
Commonly used for estate planning purposes, a trust is a fund that holds property or other assets for a person, a group of people or an organization. The two primary types of trusts are:
- Revocable: With this kind of trust fund (also called a living trust), the owner maintains control of their account's assets throughout their life. The owner, known as the grantor, can alter or cancel the trust whenever they want.
- Irrevocable: Unlike a revocable trust, the owner of an irrevocable trust no longer controls the fund's assets once the trust has been set up. Altering or canceling an irrevocable trust is complicated.
What Are the Current Rules for FDIC Insurance on Trust Accounts?
Until this year, the rules for FDIC coverage of trust accounts were confusing. Why? Because the FDIC enforced one set of rules for revocable trusts and another set of rules for irrevocable trusts. Each set of rules featured its own coverage criteria and calculation methods.
The FDIC reported in 2022 that it had responded to about 20,000 "complex" inquiries about deposit insurance per year over the past 13 years. More than half of those inquiries were related to deposit insurance for revocable trusts and irrevocable trusts.
Under the old rules, FDIC coverage for revocable and irrevocable trusts isn't calculated the same way:
- FDIC coverage for revocable trusts, including informal trusts, depends mostly on how many primary beneficiaries have been designated. For example, the coverage limit for one beneficiary is $250,000. Bottom line: The formula for figuring out coverage limits is pretty straightforward.
- FDIC coverage for irrevocable trusts is harder to understand. Why? Because the coverage calculation involves determining whether the beneficiaries' interests are contingent on anything other than survival. So, this means that all contingent interests are collectively insured up to $250,000, no matter how many contingent beneficiaries there are. As such, a contingent trust might only be insured up to $250,000, even if there are multiple beneficiaries.
What Are the New Rules for FDIC Insurance on Trust Accounts?
The key parts of the new rule for FDIC coverage of trust accounts are:
- Revocable trusts and irrevocable trusts now belong to a single FDIC category instead of separate categories. This category also includes "payable on death" (POD) accounts or "in trust for" (ITF) accounts, even if a formal trust hasn't been created.
- Insurance calculations for revocable and irrevocable trusts have been simplified.
- Each trust owner is insured up to $250,000 for each eligible primary beneficiary, with a maximum of five beneficiaries (and a total of $1.25 million). This limit applies to both revocable and irrevocable trusts.
| New FDIC Insurance Coverage for Trust Accounts, Single Owner | |
|---|---|
| Number of Beneficiaries | FDIC Insurance Limit |
| 1 | $250,000 |
| 2 | $500,000 |
| 3 | $750,000 |
| 4 | $1,000,000 |
| 5 | $1,250,000 |
| 5+ | $1,250,000 |
The FDIC notes that if someone holds a revocable trust and irrevocable trust at the same bank, the insurance limit for one owner and at least five eligible beneficiaries is up to $1.25 million per insured bank. As long as the combined balance of the trust accounts is $1.25 million, the FDIC fully insures all the money in this case. But if an account balance exceeds $1.25 million, some of the money might not be insured.
What are the insurance implications if two people, such as a married couple, hold revocable and irrevocable trusts at the same bank?
| New FDIC Insurance Coverage for Trust Accounts, Two Owners | |
|---|---|
| Number of beneficiaries | FDIC insurance limit |
| 1 | $500,000 |
| 2 | $1,000,000 |
| 3 | $1,500,000 |
| 4 | $2,000,000 |
| 5+ | $2,500,000 |
So, if two people own revocable and irrevocable accounts at the same bank and have listed the same beneficiaries, their FDIC coverage limit would be double that of the limit for one account owner. For instance, a combined balance for two trust account owners with four beneficiaries would be insured up to $2 million.
The Bottom Line
Government rules sometimes become more complicated, not less complicated. But in the case of the FDIC, insurance coverage rules for accounts held by revocable and irrevocable trusts have been simplified as of April 1, 2024. As a result, owners of trust accounts may not feel as though they need a law degree or accounting degree to figure out how much of their money is insured by the FDIC.