The Federal Deposit Insurance Corporation (“FDIC”) has published a final rule (“Final Rule”) amending its regulations governing deposit insurance that will merge the revocable and irrevocable trust deposit insurance categories into one “trust accounts” category.1 The Final Rule will take effect on April 1, 2024.
Currently, revocable and irrevocable trust accounts are accorded separate insurance coverage. By combining these insurable capacities into one, depositors will potentially have less deposit insurance coverage available to them.
Standard brokered certificate of deposit disclosure statements and broker-dealer sweep program disclosure statements each currently describe two separate categories of trust account insurable capacities. Prior to the effective date, these documents will need to be amended and depositors will need to be informed of the possibility of diminished deposit insurance coverage.
Calculating deposit insurance coverage under the new trust accounts category will follow the same method already used by the FDIC to calculate coverage for revocable trusts that have five or fewer beneficiaries: the depositor will be insured in an amount up to the total number of named beneficiaries (not to exceed five) multiplied by the standard maximum deposit insurance amount (“SMDIA”), currently $250,000. Therefore, the maximum coverage will be $250,000 per beneficiary, up to five beneficiaries, for a potential total coverage amount of $1,250,000 for all revocable and irrevocable trust accounts of the same depositor at the same bank.
Depositors who currently designate more than five beneficiaries of some irrevocable trusts, or that maintain coverage of more than $1,250,000 between their revocable and irrevocable trust accounts at the same bank, will have their total deposit insurance coverage reduced once these categories merge.
Current Insurance Categories for Trust Accounts
The FDIC currently recognizes three different insurance categories for deposits held in connection with trusts, each with its own criteria for coverage and methods by which coverage is calculated: (1) revocable trusts,2 (2) irrevocable trusts,3 and (3) irrevocable trusts with an insured depository institution (“IDI”)4 as trustee.5
Revocable Trusts
Revocable trust deposits are currently aggregated and insured up to the SMDIA per beneficiary. If the depositor has named five or fewer beneficiaries, the depositor is insured in an amount up to the total number of named beneficiaries multiplied by the SMDIA. If the depositor has named more than five beneficiaries, the depositor is insured up to the greater of: (1) five times the SMDIA; or (2) the total of the interests of each beneficiary, with each such interest limited by the SMDIA.
Irrevocable Trust Deposits
Currently, deposit insurance coverage for deposits in the irrevocable trust category depends on whether beneficiaries’ interests in the trust are contingent or non-contingent. Deposits held for contingent trust interests are aggregated and insured up to the SMDIA in total. Deposits held for non-contingent trust interests are insured up to the SMDIA for each such beneficiary (without regard to the total number of beneficiaries).
Irrevocable Trusts with an IDI as Trustee
Deposits held by a trustee IDI are currently insured up to the SMDIA for each owner or beneficiary represented (without regard to the total number of beneficiaries). This coverage is separate from the coverage provided for other deposits of the owners or the beneficiaries and will remain so under the Final Rule. Deposits held for a grantor’s retained interest are not aggregated with the grantor’s single ownership deposits, or with other trust accounts.
Other Aspects of the Final Rule
Among other items, the Final Rule also:
- Defines eligible beneficiaries for trust accounts by using the current revocable trust rule’s definition6;
- Excludes from the calculation of deposit insurance coverage beneficiaries that only would obtain an interest in a trust if one or more beneficiaries are deceased, codifying the existing practice of including only primary, unique beneficiaries in the deposit insurance calculation7;
- Codifies the FDIC’s longstanding interpretation that if an informal revocable trust designates the depositor’s formal trust as its beneficiary, the FDIC will insure the account as if it were titled in the name of the formal trust, even though a formal trust generally does not meet the definition of an eligible beneficiary for deposit insurance purposes8; and
- Amends the regulations governing deposit insurance coverage for mortgage servicing account deposits such that mortgage servicers’ advances of principal and interest funds on behalf of mortgagors would be included in the amount insured for each mortgagor up to the SMDIA.
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Seward & Kissel LLP will continue to provide insight on developments regarding deposit insurance coverage. If you need to revise your disclosure documentation, or if you have any questions about this or any other aspect of the Final Rule, please contact Paul T. Clark, Casey J. Jennings, or Nathan S. Brownback in the Washington, DC office at 202-737-8833.
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The Final Rule, as published in the Federal Register, can be found here.
The FDIC also published a fact sheet on the Final Rule that can be found here.
