Taking Full Advantage of FDIC Insurance

Given some clients’ heightened general concern over risk of loss, here is a quick survey of the current deposit insurance landscape. The Federal Deposit Insurance Corporation (FDIC) has provided deposit insurance coverage to depositors of insured banks since 1933. The insurance covers accounts at each insured bank up to a set maximum amount, which until the end of 2008 was $100,000 ($250,000 for retirement accounts). That maximum amount was increased to $250,000 through the end of 2009 pursuant to the Emergency Economic Stabilization Act of 2008 and was further extended through December 31, 2013 in the Helping Families Save Their Homes Act of 2009. Absent further Congressional action (a permanent extension is currently part of the Financial Regulatory bill), the maximum amount will revert to the pre-2009 $100,000 limit in 2014. However, the $250,000 maximum for retirement accounts already applies.

This FDIC insurance protection covers any person (whether a US citizen or not) or entity making cash deposits into accounts such as savings accounts, checking accounts, NOW accounts and Certificates of Deposit (CDs), among others. Non-cash accounts such as securities, mutual funds and other types of investments are not covered.

You can avail yourself of $250,000 of FDIC insurance coverage at as many separately insured institutions as you have accounts. At each insured institution, the $250,000 maximum coverage is not available on a per account basis, but rather on an “account ownership” basis. What this means is that an individual can have multiple accounts at the same institution and, to the extent the “account ownership” of the accounts is the same, those accounts are aggregated for the insurance coverage, up to $250,000 per ownership type.

However, there are roughly five account ownership categories, making it possible to significantly expand coverage in fact: single ownership, joint ownership, revocable trust accounts, business accounts, and retirement accounts.

Single ownership accounts are accounts that are owned by one person. They include accounts in the owner’s name, accounts established for the benefit of the owner, as well as business accounts that are in the name of the owner as a sole proprietor.

A joint ownership account is an account owned by two or more persons. Joint accounts are insured separately from single accounts only if all co-owners meet all of the following requirements. All co-owners must be natural persons, have a right of withdrawal on the same basis as each of the other co-owners, and have signed a signature card. It is important to note that giving another person withdrawal rights under the terms of a Power of Attorney or withdrawal rights that authorize withdrawal only on the owner’s behalf are not sufficient to make the account a joint account. If these three requirements are met, each co-owner’s shares of every joint account that he or she owns at the same insured bank are added together with his or her other joint account shares at the same bank, and the total is insured up to $250,000.

A revocable trust account is any account where a designated beneficiary is named to receive the proceeds of the account upon the owner’s death. The account may be either in single or joint ownership and need not be a formal trust. Creating a revocable trust account can be as simple as naming a beneficiary(s) on the account signature card (or some other bank document) or as complex as a forming a revocable living trust and naming the beneficiary(s) in that document.

The requirements that set revocable trust accounts apart from all other types of account ownership are as follows:

  • Titling of the account must indicate that it is held pursuant to a trust relationship or that the account balance is payable upon the owner’s death;
  • The beneficiaries must be named either in the trust document or in the deposit account records; and
  • The beneficiaries must be only living persons, charities or nonprofit organizations.

The calculation of the $250,000 maximum for revocable trust accounts depends on two things - the number of beneficiaries of all revocable trust accounts owned by the trust owner at the same insured institution and whether each of the beneficiaries will receive the same amount. So long as the revocable trust account owner names five or fewer beneficiaries, the maximum coverage for the trust owner across all revocable trust accounts at a single institution is determined by multiplying $250,000 times the number of different beneficiaries, regardless of the dollar amount or percentage allotted to each different beneficiary.

If a revocable trust owner names six or more beneficiaries and the beneficiaries do not each receive the same amount, the owner’s revocable trust deposits are insured for the greater of $1.25 million dollars or the sum of each beneficiary’s actual interest in revocable trust deposits up to $250,000 per beneficiary.

Business accounts include those opened in the name of a corporation, partnership or unincorporated association. They are considered owned by the entity and are insured separately from the personal accounts of shareholders, partners or members.

Retirement accounts include IRAs (traditional as well as ROTH), SEP IRA’s, simple IRAs, self-directed 401(k) accounts, self-directed Keogh accounts and government employee accounts such as 457 Plans. All retirement accounts owned by the same person at the same institution are combined for the purposes of calculating the $250,000 maximum.

The FDIC insures deposits in most, but not all, banks and savings associations. Before making a deposit, be sure your bank or savings association is insured by the FDIC by getting confirmation information directly from your institution or by calling the FDIC toll-free at 1-877-ASK-FDIC.

Ginny King
Director - Wealth Management

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