The FDIC has recently announced changes to deposit insurance for trusts. The changes just took effect on April 1, 2024, and are intended to make the rule easier to understand and to apply. To examine the new rule versus the old rule, let’s use this scenario:
Pat and June (a married couple) work with me to create a revocable living trust. They have $2 million on deposit in one FDIC covered bank. They list themselves as sole beneficiaries as long as they are alive and list their four adult children as beneficiaries for after both of them die. While Pat and June (or either of them) is alive, the trust is “revocable.” However, when both of them die the trust becomes “irrevocable.”
Under the old rule, there were different coverages for revocable trusts than for irrevocable trusts. If the insurance coverage had to be claimed due to a bank failure, the FDIC had to examine the trust documentation to decide which standard to apply. Under the new rule, revocable and irrevocable trust deposit insurance categories have been merged into a single category called “trust accounts” which are both treated the same. Further, the FDIC now treats a “pay on death” (POD) account that names after-death beneficiaries as a “informal revocable trust” subject to the new rule.
Before Pat and June established their trust or named POD beneficiaries, they had $250,000 insurance coverage each at a single bank (total coverage $500k). They could try to get more coverage by opening individual accounts and opening joint accounts, but doing so would complicate access to their funds. Hence, to protect themselves they would likely choose to spread their $2 million out in at least four different banks.
After they established their trust or set up POD beneficiaries, the old rule gave them $250,000 coverage for each beneficiary. The two of them and the four kids are all beneficiaries, so under the old rule they had $1.5 million FDIC coverage at a single bank. However, under the new rule the FDIC limits coverage to five beneficiaries maximum, so insurance coverage is capped at $1.25 million in a single bank. Either way, with the trust or POD Pat and June could insure their entire $2 million using two banks instead of four banks.
The FDIC touts the new rule as simplification, which is indeed true. They also downplay the reduced insurance coverage. Under the old rule, there was $250k coverage for unlimited beneficiaries and now there is a cap of five beneficiaries. If you only have five people in your family as beneficiaries there is no difference, but if you have a larger family or pool of beneficiaries your FDIC insurance coverage at any one bank is now restricted to $1.25 million. Hence, you may need accounts at additional banks in order to spread out the funds to achieve full coverage.
Further, what if Pat dies? June is still alive, and the trust typically remains revocable, so the beneficiary count has been reduced by one. If one of the children dies before June dies, the count is again reduced by one. Each time the beneficiary count goes down, coverage is reduced by $250k. This may necessitate spreading the funds among more banks to retain full FDIC coverage or adding new beneficiaries if prior ones die.
Talk to me about establishing a Living Trust to expand your FDIC coverage, and about the other broad benefits of a Living Trust, like management during a disability and avoidance of probate.
Paul Premack is a Certified Elder Law Attorney for Wills and Trusts, Probate, and Elder Law issues. He is licensed to practice law in Texas and Washington. To contact us, click here.
Column published on April 11, 2024.