As we look back on 2023, the anxiety we felt as we watched multiple banks fail over a few weeks will stick in our memories. The safety of our bank deposits often is taken for granted. But over those few weeks, even those without large balances in their bank accounts wanted to find out a little more about how their hard-earned money is protected should their bank become insolvent.

Many of our clients specifically sought information about FDIC insurance limits for bank deposits owned by trusts. The answer to this question is not a straightforward one. The answer depends on many factors, including the type of trust (revocable or irrevocable), the number of beneficiaries, and the type of interest each beneficiary holds in the trust. Fortunately, the FDIC recognized the need to simplify how insurance coverage is calculated for trust accounts, and new rules will go into effect on April 1.

At the highest level, the new rules provide that a grantor’s (the individual who creates the trust) trust-owned bank deposits will receive FDIC insurance of $250,000 per beneficiary, up to five beneficiaries, for maximum FDIC insurance coverage of $1.25 million at any banking institution. The new rules no longer distinguish between revocable and irrevocable trusts. There is now just one category: “trust accounts” (note that “trust accounts” also include bank accounts with a pay-on-death designation). What does this mean? Let’s take a common trust scenario and apply these rules.

James creates a revocable trust to benefit himself during his lifetime and his four children at his death. James opens a bank account titled in the name of his revocable trust at Bank A. To calculate the FDIC insurance coverage for this account, we only need to identify the number of trust beneficiaries. Under the new rules, because James is the grantor of the trust, he is not counted as a beneficiary, even though he can receive funds from the trust. However, all four of James’ children are beneficiaries. Therefore, the deposits in the trust-owned account at Bank A will be insured for up to $1 million (four beneficiaries x $250,000).

Let’s take another common scenario. George and Martha create an irrevocable trust for the benefit of their two children. George and Martha open a bank account titled in the name of the irrevocable trust at Bank B. The bank deposits in this trust-owned account at Bank B will also be insured up to $1 million. This is because the irrevocable trust in our scenario has two grantors. Under the new rules, each living grantor of a trust is treated as separately insured. George and Martha are still not counted as beneficiaries, but their two children are effectively counted twice ($250,000 x two grantors x two beneficiaries).

Even though the new rules will be easier to apply than prior versions, there are still complexities that can come into play beyond this article’s scope. Your advisor at Trust Company of Oklahoma is here to help you with your questions about FDIC insurance for your trust-owned bank accounts.