Wealthy Americans may want to 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 were no limits 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.
Learn more: What is the FDIC and how does it work?
For tens of thousands of banking customers, this change could reduce the amount insured on these accounts in the event of the bankruptcy of their financial institution. Affected individuals may need to restructure their deposits or open new accounts at another bank to ensure their funds are 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, which is owned by LendingTree.
“It may well be that a large number of depositors do not have the insured deposits that they accepted when the account was initially opened.”
What doesn’t change is that the FDIC still insures up to $250,000 per depositor 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. This means that you, the depositor, have a total of 300 000 in one type of property category (single accounts) in 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 in a joint account – which is a different category of ownership – the amount would be fully insured even if it remained in the same bank.
Trust accounts offered a loophole to insure more than $250,000. Under the old FDIC rules, each beneficiary of the trust would have $250,000 of insurance protection. So, for example, if the trust named 10 beneficiaries, then that account would be insured for $2.5 million.
“Prior to this change, many people did not know that you could theoretically insure an almost infinite amount in a bank through FDIC rules through a trust account,” Tumin said.
This is no longer the case. The new rule limits the number of trust beneficiaries who receive the $250,000 insurance amount to five, for a maximum total of $1.25 million.
Additionally, irrevocable trusts and revocable trusts are now grouped into one property category – trust accounts – under the new rules. This new category also includes any deposit account that has named…