Wealthy 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.
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 will be insured after a bank fails.
See more information: What is the FDIC and how does it work?
For tens of thousands of bank customers, the change could reduce the amount insured on these accounts in the event of their financial institution’s bankruptcy. Those affected may have to restructure their deposits or open new accounts at another bank to ensure the protection of their funds.
“It’s a bit of a dark change… and the loss of some insured deposits is something I’m not sure the FDIC highlighted enough,” said Ken Tumin, founder of DepositAccounts.com, owned by LendingTree.
“There may well be many depositors out there who may not have the insured deposits they assumed when they originally opened the account.”
What’s not changing is that the FDIC still guarantees up to $250,000 per depositor per account category at each bank.
Here’s how this works: Let’s say you have $250,000 in an individual savings account and $50,000 in an individual checking account at Bank A. This means you, the depositor, have $300,000 total in one type of property category (accounts individual) at the same bank, so only $250,000 is insured.
If you transferred that $50,000 to another bank, it would be fully insured. Likewise, if you put that $50,000 into a joint account – which is a different property category – the amount would be fully insured, even if it remained at the same bank.
Trust accounts provided a loophole to secure more than $250,000. Under old FDIC rules, each beneficiary of the trust would receive $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 didn’t know that it would theoretically be possible to hold a nearly infinite amount of money in a 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, totaling a maximum of $1.25 million.
Additionally, irrevocable trusts and revocable trusts are now grouped into a single property category – trust accounts – under the new rules. This new category also includes any deposit account that has named beneficiaries after the owner’s death, such as a certificate of deposit or CD.
See more information: Are CDs FDIC Insured and Why Is That Important?
Thus, the fund that was previously insured for $2.5 million for its 10 beneficiaries is now insured for just $1.25 million.
“From April onwards, you lose half of that [insurance]”, Tumin said.
When the Proposed FDIC those rules in 2022 — a year before talk about lifting the $250,000 insurance limit bubbling up during a series of bank failures — estimated that nearly 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 and irrevocable trusts into one property category could decrease coverage “in limited cases.”
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 are affected, use the FDIC tool – Electronic Deposit Insurance Estimator – to find out per bank how much of your money, if any, exceeds the new coverage limits.
If you discover that some of your money is not insured, speak 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 amount into an account at another bank.
Janna Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @JannaHerron.
