FDIC Simplifies Deposit Insurance for Trust Accounts

Despite the FDIC’s past efforts to simplify the trust rules, the FDIC continues to answer more than 10,000 trust account insurance questions each year.  In a further attempt to simplify deposit insurance for trust accounts, the FDIC recently again amended the revocable trust deposit insurance regulations found at 12 CFR 330.10 and removed the irrevocable trust deposit insurance regulations found at 12 CFR 330.13.

Although previously separate categories, the final rule combines revocable and irrevocable trusts into one new “trust account” deposit insurance category.  This category includes the following types of trusts: (1) informal revocable trust deposits, such as payable-on-death (POD) accounts, in-trust-for accounts, and Totten trust accounts; (2) formal revocable trust deposits where there is a written trust agreement (where funds pass to one or more beneficiaries upon the grantor’s death), (3) irrevocable trust deposits, where an irrevocable trust is established either by a written trust agreement or by statute. The final rule provides that a trust’s deposits will be insured in an amount up to the standard maximum deposit insurance amount (referred to in the regulation as “SMDIA,”) of $250,000.  Because varying trust account deposits would be considered to be part of the same category for deposit insurance purposes, they would be aggregated when applying the deposit insurance limit. 

Under the final rule, the method used to calculate deposit insurance will be the SMDIA multiplied by the number of trust beneficiaries, up to a total of five beneficiaries. This effectively limits coverage for each trust account to a total of $1,250,000 ($250,000 x five beneficiaries).  If this method sounds familiar, it is because this method is currently used to calculate coverage for revocable trusts. The FDIC felt that this aspect of the current rules is generally well-understood and retaining this method of calculation seemed preferable to creating a new method.  Eligible beneficiaries under the final rule include natural persons, charitable organizations and non-profit entities.  A word of note, however: this rule doesn’t go into effect until April 1, 2024 in order to give banks time to implement changes and train employees.

In many ways this final rule is applying the rules that currently apply to revocable trusts to irrevocable trusts. The current rules for revocable trusts apply to the various types of revocable trusts discussed above, calculate insurance as described above, and define eligible beneficiaries as described above as part of the final rule.  

The current rules for irrevocable trusts are a bit more complex and are undergoing wholesale changes. Although there are no limits on “eligible beneficiaries” as there are for revocable trusts, calculating coverage for irrevocable trust deposits currently requires a determination of whether beneficiaries’ interests are contingent or non-contingent. Non-contingent interests are interests that may be determined without evaluation of contingencies, except for those covered by the present worth and life expectancy tables in the IRS Regulations.  Funds held for non-contingent trust interests are insured up to the SMDIA for each beneficiary. Funds held for contingent trust interests are aggregated and insured up to the SMDIA in total. This distinction will be going away when the final rule goes into effect.

The final rule does not change the rules for deposits held by an insured depository institution as trustee of an irrevocable trust.  These remain to be governed Section 7(i) of the Federal Deposit Insurance Act, which is found in the federal regulations at 12 CFR 330.12.