New FDIC Rule Simplifies Banking for Trusts

On Friday, January 21, 2022, the Federal Deposit Insurance Corporation (“FDIC”) approved a new rule that will simplify the agency’s deposit insurance coverage regulations. Life just got easier for clients with deposits in Revocable and Irrevocable Trusts. The FDIC is merging the two deposit insurance categories for revocable and irrevocable trusts and applying a simpler coverage calculation. This resulted from the number of inquiries on trust deposits which exceeded all other FDIC inquiries combined. The rule will go into effect on April 1, 2024. The hope is that it will create a consistent and easier process for bankers and depositors.

Basically, the new rule is the insuring up to $250,000 for each primary trust beneficiary (not to exceed 5), regardless of the revocable or irrevocable nature of the trust, and regardless of contingencies or the allocation of fund among beneficiaries; and the maximum deposit insurance coverage of $1,250,000 per insured depository institution for trust deposits. For example, you create an irrevocable trust for your daughter and her three children. The Trustee can distribute income and principal to any of them. Therefore, if this irrevocable trust deposits $1,000,000 in Bank A and $1,000,000 in Bank B, then the deposits in both banks will be protected by FDIC insurance, while if this irrevocable trust deposits $1,500,000 in Bank C, only $1,000,000 of this account be protected by FDIC insurance.

The FDIC does not expect most trust depositors to experience any change in coverage when the rule takes effect, but will be giving a two-year lead time for banks and depositors to become familiar with the new regulation. You can read the new rule here.

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