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Changes are coming: FDIC insurance and trust accounts

Jul 06, 2022
By: Shelley Foster

The aftermath of COVID-19, Russia sanctions and domestic supply shortages have all negatively impacted the economy and increased inflation. Many Americans believe an economic downturn is imminent and a recession is on the horizon.

With the risk of a recession, consumers are making changes to protect their money. More are putting their money into accounts at financial institutions rather than risking it in the stock market and other investments. But is all of their money insured?

Upcoming changes around FDIC insurance coverage

The Federal Deposit Insurance Corporation (FDIC) provides deposit insurance for accounts at FDIC insured depository institutions (IDI). The deposit insurance protects the account owner’s money in the event of bank failure. Accounts are insured $250,000 per depositor, per IDI, for each ownership category.

In January 2022, the FDIC amended the deposit insurance rules to make it easier to calculate insurance for trust accounts.

Under the current rule, the FDIC recognizes three difference insurance categories for deposits held in connection with trusts: 1) revocable trusts, 2) irrevocable trusts and 3) irrevocable trusts with an IDI as trustee — and FDIC insurance is calculated differently for each category. Due to the large number of questions regarding FDIC insurance and trust accounts (approximately 10,000 a year), the FDIC is changing the rule so insurance for revocable trusts and irrevocable trusts will be calculated the same way.

The current coverage limits for revocable trusts is $250,000 per owner per beneficiary up to five beneficiaries; however, more coverage is available with six or more beneficiaries subject to specific limitations and requirements. For irrevocable trusts, the coverage is $250,000 for the non-contingent, ascertainable interest of each beneficiary. Irrevocable trusts with an IDI as trustee are insured up to $250,000 for each owner or beneficiary.

The final rule combines the first two trust categories (“revocable” and “irrevocable”) into one category called “trust accounts,” amends 330.10, and simplifies the insurance coverage for trust accounts. The same coverage criteria will be used for both types of trusts, and a simplified formula to calculate deposit coverage will be $250,000 per account owner per beneficiary up to five beneficiaries regardless of the type of trust.

While this change will make the calculation for trust accounts simpler to determine, it could adversely impact some depositors with large balances. For example, a trust account may have $2,800,000 in FDIC insurance today but after the change may only have $250,000 in FDIC insurance.

How you can plan ahead

This rule doesn’t go into effect until April 1, 2024, so there is time to take appropriate steps to be prepared. If you haven’t done so already, read the final rule issued January 28, 2022. Visit the FDIC website for upcoming live seminars and other resources. Contact Wipfli to learn how we can help your financial institution with these changes.

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Shelley Foster, CRCM, CCBIA
Senior Manager, Internal Audit and Regulatory Compliance
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