Finance
The FDIC change means that wealthy bank depositors have less protection
Affluent Americans may want to double-check how much of their bank deposits are protected by government-backed insurance.
New rules implemented last month limited what the Federal Deposit Insurance Corporation (FDIC) will insure on a trust account to $1.25 million.
Previously, there was no limit on trust accounts, which are legal arrangements that ensure an individual’s assets are distributed to specific beneficiaries.
The FDIC said the new rule will make it easier for consumers and bankers to understand deposit insurance rules. It is also designed to help FDIC agents more quickly determine which accounts are insured after a bank fails.
Read more: What is the FDIC and how does it work?
For tens of thousands of bank customers, the change could lead to a reduction in the sum insured on those accounts if their financial institution goes bankrupt. Those affected may need to restructure their deposits or open new accounts with another bank to ensure their money is protected.
“It’s a somewhat obscure change… and the loss of some insured deposits is something I’m not sure the FDIC has emphasized enough,” said Ken Tumin, founder of DepositAccounts.com, owned by LendingTree.
“It is entirely possible that there are many savers who may not have the insured deposits they assumed when they originally opened the account.”
What doesn’t change is that the FDIC still insures up to $250,000 per depositor and per account category at each bank.
Here’s how it works: Let’s say you have $250,000 in an individual savings account and $50,000 in an individual checking account at Bank A. That means you, the depositor, have a total of $300,000 in one type of ownership category (single accounts) at the same bank, so only $250,000 is insured.
If you moved that $50,000 to another bank, it would be fully insured. Likewise, if you were to put that $50,000 into a joint account – which is a different ownership category – the amount would be fully insured even if it stayed with the same bank.
Trust accounts provided a loophole to insure more than $250,000. Under the old FDIC rules, each beneficiary of the trust would receive $250,000 in insurance protection. So, for example, if the trust named ten beneficiaries, that account would be insured for $2.5 million.
“Before this change, many people didn’t know that you could theoretically insure an almost infinite amount of money with one bank under FDIC rules through a trust account,” Tumin said.
That is no longer the case. The new rule limits the number of trust beneficiaries receiving the $250,000 insurance amount to five, for a total of up to $1.25 million.
In addition, under the new rules, irrevocable trusts and revocable trusts are now combined into one property category: trust accounts. That new category also includes any deposit account that names beneficiaries upon the owner’s death, such as a certificate of deposit or a CD.
Read more: Are CDs FDIC insured, and why does that matter?
The trust fund, which was previously insured for $2.5 million for the ten beneficiaries, is now only insured for $1.25 million.
“From April you will lose half of that [insurance]Tumin said.
When the FDIC proposed these rules in 2022 – a year before talk of lifting the $250,000 insurance limit that bubbled up during a series of bank failures – it was estimated that nearly 27,000 depositors in trust accounts and just over 36,000 trust accounts ‘could be directly affected by this aspect of the final rule’. .”
In addition, merging revocable trusts and irrevocable trusts into one property category could reduce coverage “in limited circumstances.”
Still, a small number of irrevocable trusts could see an increase in insurance coverage under the new rules, the FDIC said, while most savers generally should see no change in their coverage.
Use the FDIC’s tool to find out if you’re affected: Electronic deposit insurance estimator – to determine per bank how much of your money, if any, exceeds the new coverage limits.
If you notice that some of your money is now uninsured, contact your bank. Financial institutions typically work with customers affected by regulatory changes to ensure their large deposits are protected. You may need to open a different type of account or transfer the uninsured amount to an account at another bank.
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
