FDIC change that leaves wealthy bank depositors with less protection

Wealthy 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 FDIC would insure in a $1.25 million trust account.

Previously, there was no limit to 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 identify insured accounts more quickly after a bank failure.

Read more: What is the FDIC and how does it work?

For tens of thousands of bank customers, the change could reduce the amount of insurance in those accounts if their financial institution fails. Those affected may need to restructure their deposits or open new accounts in another bank to ensure the protection of their money.

“It’s a pretty mysterious change…and the loss of some insured deposits is something I’m not sure the FDIC has highlighted enough,” said Ken Tomin, founder of LendingTree-owned DepositAccounts.com.

“There may be a lot of depositors who may not have the insured deposits that they assumed when they originally opened the account.”

FILE - The Federal Deposit Insurance Corporation (FDIC) seal is seen outside its headquarters, on March 14, 2023, in Washington.  Regulators shut down Republic First Bank, a regional bank with operations in Pennsylvania, New Jersey and New York.  The Federal Deposit Insurance Corporation (FDIC) said on Friday, April 26, 2024, that it had seized the Philadelphia-based bank, which had nearly $6 billion in assets and $4 billion in deposits as of January 31.  (AP Photo/Manuel Balce Ceneta, File)

The seal of the Federal Deposit Insurance Corporation (FDIC) is seen outside its headquarters, on March 14, 2023, in Washington. (AP Photo/Manuel Bals Sinita, File) (News agency)

What hasn’t changed is that the FDIC still insures up to $250,000 per depositor and per account class at every 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. This means that you, the depositor, have a total of $300,000 in one type of property class (individual accounts) at the same bank, so only $250,000 is insured.

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If you move $50,000 to another bank, it will be fully insured. Likewise, if you put $50,000 into a joint account — which is a different ownership class — the entire amount will be insured even if it stays in the same bank.

Trust accounts provided a loophole to secure more than $250,000. Under old FDIC rules, each fund beneficiary would receive $250,000 in insurance protection. So, for example, if the organization designates 10 beneficiaries, that account would be insured for $2.5 million.

“Before this change, a lot of people didn’t realize that you could theoretically secure an almost infinite amount in a single bank through FDIC rules through a credit account,” Tomin said.

This is no longer the case. The new rule limits the number of trust beneficiaries receiving the $250,000 security deposit to five, for a total of at most $1.25 million.

In addition, irrevocable trusts and revocable trusts are now grouped together into one property category – trust accounts – under the new rules. This new category also includes any deposit account whose beneficiaries are named upon the owner’s death, such as a certificate of deposit or CD.

Read more: Are CDs insured by the FDIC, and why does it matter?

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

“As of April, you will lose half of that [insurance]Tommen said.

(Image: Getty Creative)(Image: Getty Creative)

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

when The Federal Deposit Insurance Corporation (FDIC) suggested. These rules in 2022 — a year before there was talk of raising the $250,000 insurance cap during a series of bank failures — estimated that nearly 27,000 credit account depositors and just over 36,000 trust accounts “could be affected.” “directly with this aspect of the final rule.”

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Additionally, consolidating revocable trusts and irrevocable trusts into a single estate class may reduce coverage “in limited circumstances.”

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

To find out if you’re affected, use the FDIC’s tool — Electronic deposit insurance estimator – To find out how much of your money, if any, exceeds the new coverage limits, on a per-bank basis.

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 place the uninsured amount in an account at another bank.

Jana Herron is a senior columnist at Yahoo Finance. Follow her on Twitter @Jana Herron.

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