Understanding the New FDIC Rules for Trust Accounts (2024)

Effective April 1, 2024, significant changes are coming to the rules governing trust accounts insured by the Federal Deposit Insurance Corporation (FDIC). These changes aim to simplify and streamline the application process for determining FDIC coverage, providing peace of mind to depositors who want to ensure their accounts are fully protected. In this comprehensive guide, we'll break down the amendments to the rules, how they impact various types of trust accounts, and what you need to know to make the most of these changes.

1. The Current FDIC Coverage Limits

Currently, the FDIC provides up to $250,000 in insurance per depositor per bank. This coverage amount, however, varies depending on the type of account and the identity of the depositor. For individual depositors, it's a straightforward $250,000. Trust accounts, on the other hand, are more complex, potentially receiving up to $1.25 million of coverage per bank if they have multiple beneficiaries.

2. Amendments Effective April 1, 2024

In January 2022, the FDIC announced amendments to the rules governing trust accounts, which will become effective on April 1, 2024. This significant lead time was provided so that depositors could adjust their accounts accordingly to maximize their coverage under the new rules. The amendments are designed to simplify the FDIC coverage rules for trust accounts, removing complexities associated with trust coverage determinations.

3. Simplification of Coverage Rules for Trusts

Same Definition of Trusts: The amended rules retain the broad definition of trusts. They encompass not only formal trusts established under a trust agreement but also accounts such as "payable on death" (POD) or "in trust for" (ITF) accounts, even if no formal trust has been established. These types of accounts are treated as informal revocable trusts.

Same Coverage Rule for Revocable and Irrevocable Trusts—Maximum of $1.25 Million: As of April 1, 2024, the same rules will apply to determine FDIC coverage for both revocable and irrevocable trusts. This means that all trust deposits can receive a maximum of $1.25 million in FDIC coverage per trust account owner (or $250,000 per eligible beneficiary, up to five beneficiaries) per bank, regardless of the trust's revocable or irrevocable nature.

4. Other Complex Rules Eliminated

The current rules include several complex rules that have made it challenging for depositors to understand and apply. The amendments simplify or eliminate many of these rules, making the process more straightforward.

Springing Trust Rule Eliminated: The so-called "springing trust rule" has been removed, simplifying the application of FDIC coverage limits to revocable trusts that become irrevocable.

Bank Records Simplified: The requirement for bank records to specifically indicate whether an account is a POD or ITF account has been eliminated. While beneficiaries of informal revocable trusts must still be identified in the bank's records, depositors no longer need to worry about the specific account designation.

Aggregation of Grantor's Interest: Under the current rules, the grantor's interest in an irrevocable trust is aggregated with the grantor's single accounts at the same bank. The amended rules change this, allowing for separate coverage.

Trust Beneficiary Identification: Where a trust identifies another trust as a beneficiary, the amendments look through to identify the eligible beneficiaries of the trust account. This provides more clarity regarding coverage.

Payable Upon Death to Formal Trust: In cases where an informal revocable trust is payable upon death to a formal trust, the rules will treat the account as if it is in the name of the recipient's formal trust.

5. Prepare for the Changes

While the FDIC has simplified the process of determining coverage limits, these rules do not take effect until April 1, 2024. This advanced notice allows account holders time to review their personal and trust accounts, consider their coverage, and make any necessary adjustments. If you have questions or need assistance with coverage determination, don't hesitate to seek professional guidance.

In conclusion, the upcoming changes to the FDIC rules for trust accounts bring much-needed simplification and uniformity to the coverage determination process. By understanding these changes and taking the time to review your accounts, you can ensure that your deposits are fully protected under the new rules, providing peace of mind in these uncertain times.

Understanding the New FDIC Rules for Trust Accounts (2024)
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