On January 21, 2022, The Federal Deposit Insurance Corporation (FDIC) adopted a new deposit insurance rule for “trust accounts” and mortgage servicing accounts that makes it easier to understand. These rules will go into effect April 1, 2024.
The highlights of the new rules are as follows:
- The final rule provides a maximum amount of deposit insurance coverage of $1.25M per owner, per insured depository institution for trust deposits.
- The revocable and irrevocable trust deposit insurance categories will be merged into a new “trust accounts” category.
- Under the final rule, a deposit owner’s trust deposits will be insured in an amount up to $250K per beneficiary, not to exceed five beneficiaries, regardless of whether a trust is revocable or irrevocable.
- The final rule establishes a simple, consistent formula for calculating deposit insurance coverage for all revocable and irrevocable trust accounts.
- The final rule is intended to facilitate more timely deposit insurance determinations for trust accounts in the event of a bank failure by streamlining the detailed, time-consuming review of trust agreements that is often required under the current, complicated trust rules.
- Additionally, mortgage servicers’ advances of principal and interest funds on behalf of mortgagors in a mortgage servicing account would be insured up to $250K per mortgagor.
This new rule will simplify the insurance coverage for trust accounts by reducing the number of insurance rules for trust accounts, eliminating complex parts of the revocable and irrevocable trust rules, and using the same insurance calculation for both. The new rule will merge irrevocable and revocable trust categories into one category… trust accounts. Each deposit owner under this category will be insured up to $250K per eligible primary beneficiary, up to a maximum of five beneficiaries regardless of whether the trust is revocable or irrevocable, and regardless of contingencies or allocation of funds among the eligible beneficiaries. It means that the new rule will provide a maximum amount of deposit insurance coverage of up to $1.25M per owner, per insured depository institution for trust deposits.
As an example, a trust owner with three eligible primary beneficiaries, will be insured up to $750K (3 eligible beneficiaries x $250K = $750K). Under the new rule, insurance limits for irrevocable trusts will be calculated the same as for revocable trusts. If the same trust owner has both revocable and irrevocable trust accounts at the same bank, under the new rule, the insurance limit with one owner and 5 or more eligible beneficiaries will be up to $1,25K per insured bank, so as long as the combined balances of their revocable and irrevocable trust accounts is $1.25M or less, the depositor is fully insured.
Also, a revocable trust owner(s) with 6 or more eligible beneficiaries and is currently unsured up to $1.25M and they have no irrevocable trust, under the new rule they will remain to insured up to $1.25M per owner, per bank.
A revocable trust owner(s) with 6 or more eligible beneficiaries who want to insure no more than $1.25M per owner, per bank and they have no irrevocable trust, under the new rule their coverage remains the same.
An irrevocable trust owner with less than $250K and no revocable trust deposits, under the new rule, their coverage remains the same.
An irrevocable trust owner, up to five beneficiaries with no-contingent trust interest and no revocable trust deposits, under the new rule, their coverage remains the same.
Coverage May Decrease for Some Depositors
A single depositor insured under the current revocable trust rule for more than $1.25M per bank will be only insured up to $1.25M per bank under the new rule – even if there are more than five beneficiaries.
Two co-grantors insured under the current revocable trust account category for more than $2.5M per bank, under the new trust rule now the insurance limit will be up to $2.5M per bank even if there are more than 5 beneficiaries.
Coverage May Increase For Some Depositors
The current rule limits the insurance coverage up to $250K per bank, even if irrevocable trust has multiple beneficiaries due to beneficial interest having contingencies attached. Under the new rule, let’s say we have one owner and three eligible beneficiaries, the limit changes to up to $750K per bank.
What about individual depositors (private and business) with no beneficiaries?
FDIC is pressured to change the individual depositor limit, but now it stays at $250K per depositor per bank. FDIC backed deposits exceeding $250K limit when Silicon Valey and Signature Bank failed to reduce the domino effect of further failures, but the official limit remains at same level since 2010 when it was last changed by Congress from $100K (earlier temporarily raised in 2008 in response to 2008 crisis).
In response to the pressures, in May 2023, the FDIC released report outlining 3 options for the future deposit system changes – Limited Coverage, Unlimited Coverage, and Targeted Coverage. The limited coverage will maintain the current insurance structure with a finite limit across all depositors and types of accounts which may mean increased but finite deposit limits. Unlimited coverage would speak up for its name – unlimited coverage with no limits. Targeted coverage would provide different levels of deposit insurance coverage for different types of accounts including higher coverage for business accounts.
Increasing the insurance cap on business payment accounts would likely result in increasing the premiums that banks pay to the FDIC and this decision will require Congressional action. On the other hand, this change needs to happen soon since the fears over the stability of the banking system created enormous deposits from smaller regional banks to larger banks, as the customers started moving their money to banks that are seen as “too big to fail.”
As of August 2023, the Senate Committee on Banking, Housing, and Urban Affairs is weighing and evaluating whether to bump up the insurance limit, or rather use a more targeted approach to ensure that certain accounts have more coverage, or maybe completely embrace universal coverage.
Iwona Sornat, CPA
Iwona is a Manager in Cerini & Associates’ audit and consulting practice, and she has more than 10 years of experience in providing various audit, review, accounting services to nonprofit, for-profit and government clients. Iwona has a strong background of financial statement and audit experience, including all aspects of grant compliance and single audit testing (Uniform Guidance). Iwona’s technical knowledge and experience allows her to provide effective and efficient audit service to her clients.