The FDIC change that leaves wealthy bank depositors with less protection

The FDIC change that leaves wealthy bank depositors with less protection

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Affluent Americans may want to double-check how much of their bank deposits are protected by government-backed insurance.

New rules implemented last month capped what the Federal Deposit Insurance Corporation (FDIC) will insure in a trust account at $1.25 million.

Before, 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 lower how much in those accounts are insured if their financial institution fails. Those affected may need to restructure their deposits or open new accounts at another bank to ensure their funds are protected.

“It’s somewhat of an obscure change … and the loss of some insured deposits is something I’m not sure the FDIC has highlighted enough,” said Ken Tumin, founder of DepositAccounts.com, which is owned by LendingTree.

“There may very well be a lot of depositors out there that might not have the insured deposits they had assumed when they originally opened the account.”

The Federal Deposit Insurance Corporation (FDIC) seal is shown outside its headquarters, March 14, 2023, in Washington. (AP Photo/Manuel Balce Ceneta, File) (ASSOCIATED PRESS)

What isn’t changing is that the FDIC still insures up to $250,000 per depositor and per account category at each bank.

Here’s how that works: 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 $300,000 total 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. Similarly, if you put that $50,000 in a joint account — which is a different ownership category — the amount would be fully insured even if it stayed at 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 get $250,000 in insurance protection. So, for example, if the trust named 10 beneficiaries, then that account would be insured for $2.5 million.

“Before this change, many people weren’t aware that you could theoretically insure almost an infinite amount at one bank through the FDIC rules through a trust account,” Tumin said.

That’s no longer the case. The new rule limits the number of trust beneficiaries that receive the $250,000 insurance amount to five, totaling at most $1.25 million.

Additionally, irrevocable trusts and revocable trusts are now lumped together into one ownership category — trust accounts — under the new rules. That new category also includes any deposit account that has named beneficiaries upon the owner’s death, such as a certificate of deposit, or CD.

Read more: Are CDs FDIC insured, and why does that matter?

So, the trust that previously was insured for $2.5 million for its 10 beneficiaries is now insured only for $1.25 million.

“As of April, you lose half of that [insurance],” Tumin said.

(Photo: Getty Creative) (Helen King via Getty Images)

When the FDIC proposed these rules in 2022 — a year before talk about lifting the $250,000 insurance cap bubbled up during a run of bank failures — it estimated that almost 27,000 trust account depositors and just over 36,000 trust accounts “could be directly affected by this aspect of the final rule.”

Additionally, merging revocable trusts and irrevocable trusts into one ownership category could decrease coverage “in limited instances.”

Still, a small number of irrevocable trusts could see an increase in insurance coverage under the new rules, the FDIC said, while overall most depositors should not see a change in their coverage.

To find out if you’re affected, use the FDIC’s tool — Electronic Deposit Insurance Estimator — to figure out on a per-bank basis how much of your money, if any, exceeds the new coverage limits.

If you find that some of your money is now uninsured, talk to your bank. Financial institutions typically work with customers affected by regulatory changes to ensure their large deposits are protected. You may end up needing to open a different type of account or put the uninsured sum in an account at another bank.

Janna Herron is a Senior Columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.

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