FDIC and what does it do?

  • Written by David
  • May 29, 2008 at 1:23 pm
  • 0
  • Below is an article i recently came across in a trade journal which provides a nice review of today’s FDIC insurance for bank deposits. This review, however, does not replace your need for advice from professional tax and legal advisors whom know your specific situation.

    The article….

    Investors are smart, and maybe even financially savvy, but how many times do you see them owning multiple Certificates of Deposit at multiple banks because of the $100,000 insurance limit? Some of them think they are “beating the system” by owning two jointly held CDs at the same bank, just reversing the order of their Social Security numbers. The proliferation of different banks can begin to resemble the carefully buried nuts of a busy squirrel. Anyone who has tried to streamline the finances of an aging parent or consolidate the financial assets of a surviving spouse will be able to relate to the headache this fragmentation can cause.

    Interestingly, most people, including many advisors, don’t have the foggiest idea how the FDIC insurance program really works.

    What is the FDIC and what does it do?

    The Federal Deposit Insurance Corporation is an independent agency of the US government. It insures all deposits such as checking, savings, NOW, money markets, and CDs, held in an insured bank or savings and loan association. It has two levels of insurance coverage; basic and separate.

    Basic Coverage

    This is how the $100,000 myth started. FDIC insures $100,000 per depositor per insured bank. If a family has less than $100,000 in all of their accounts combined, at the same bank, they are fully insured.

    Separate Coverage

    Here is where the confusion occurs. Aside from the increased coverage limits for certain retirement plans, depositors can qualify for additional coverage based upon the ownership categories of their deposits. There are four common ownership categories:

    * Single, or Individual Accounts
    * Certain Retirement Accounts
    * Jointly Owned Accounts
    * Revocable Trust Accounts

    Single Accounts

    This is an account owned by one person and registered in that person’s name only. All the single accounts for one depositor in one insured bank are added together and the total is insured by FDIC up to $100,000.

    Certain Retirement Accounts

    Certain retirement accounts are insured up to $250,000 per depositor/ per insured bank. These include IRAs, SEP-IRAs, Roth IRAs, SIMPLE IRAs, and section 457 deferred compensation plans. Other self-directed defined contribution plans, such as H.R. 10 or Keogh plans are also covered up to $250,000 per depositor. If one depositor has a $100,000 IRA, a $50,000 Roth IRA and a $150,000 Keogh plan at the same bank, only $250,000 out of the total $300,000 in retirement plan assets would be insured by the FDIC. Having multiple beneficiaries on retirement accounts does not increase the amount of FDIC coverage.

    Coverdell (Education) IRAs, Health Savings Accounts, Medical Savings Accounts, or defined-benefit plan accounts are not eligible for this additional coverage limit.

    Jointly Owned Accounts

    These are deposit accounts owned by two (or more) people and registered in the names of the joint owners. If each owner has equal rights to withdraw money from a joint account, then each person’s share of all joint accounts in that bank are added together and insured up to $100,000. For example, if a couple owns a joint checking account and a joint savings account with a combined total of $200,000 in the same bank, the full $200,000 is insured.

    The wife is insured for her ½ share of joint deposits up to $100,000, and the husband is insured for his ½ share of joint deposits up to $100,000. These limits would be in addition to the $100,000 of coverage that each of them could have at the same bank on individually owned deposits, such as an individual checking account. The order in which the joint owners’ Social Security numbers appear is irrelevant. Alternating the use of “and,” “or,” or “and/or” in the registration also has no effect on coverage limits for jointly owned deposits.

    Qualifying Formal Revocable Trust Accounts

    Traditional revocable trusts, also known as living trusts or inter-vivos trusts are established with a trust document that identifies the grantor, trustee, and beneficiaries. Deposit accounts registered to these formal revocable trusts are considered a separate ownership category from individual or jointly owned assets. Coverage is available only if the beneficiaries of the trust meet the qualifying standards. The beneficiaries must be natural persons with an immediate, familial relationship to the grantor of the trust (spouse, child, parent, grandparent, or sibling). Step-parents, stepchildren and adopted children with also qualify, but nieces, nephews, cousins, or in-laws will not.

    The amount of coverage available to each beneficiary is based upon the actual interest of each beneficiary. Unless the trust states otherwise, the FDIC will insure each beneficiary as if their interest in the living trust account were equal, up to $100,000 per beneficiary/per owner. If one beneficiary is entitled to income from the trust for life, and other beneficiaries are entitled to the remainder of the assets, then all these beneficiaries will be treated as having an equal interest, unless the trust states otherwise.

    A wife has a living trust account giving her husband the income of the trust for his lifetime, with the remainder going to their two children equally at his death. Her trust account would be insured up to $300,000 ($100,000 for each of the three beneficiaries). If this trust were jointly owned between the husband and the wife, the insurance limit would be $600,000 ($100,000 per beneficiary/per owner).

    Qualifying Informal Revocable Trust Accounts

    The most common form of a revocable trust account is a Payable on Death or Transfer on Death accounts. These are also known as Totten trust accounts. If the beneficiary of a POD account qualifies under the same rules as above, then the FDIC insurance limit is the same $100,000 per beneficiary/per owner. All of the revocable trust accounts, formal and informal, with the same owner for benefit of the same qualifying beneficiary held at the same bank, are added together to reach this $100,000 limit.

    Other Ownership Categories

    Irrevocable Trust accounts are considered a separate ownership category from Revocable Trust accounts, but the rules work essentially the same.

    Corporations, partnerships and associations are also a distinct ownership category and their deposits will also be insured up to $100,000, separate from the insurance provided to the personal accounts of the owners, shareholders, or partners. The insurance limit is per account, not per owner, shareholder or partner.

    Add it all up and one depositor with multiple ownership categories can qualify for a great deal more than $100,000 of FDIC coverage at one bank. Just make sure the bank displays the FDIC logo on the door.

    Helen Modly, CFP, CHFC, is vice president and director of investment services for Focus Wealth Management. The views expressed in this article are the author’s.

    FDIC’s website: http://www.fdic.gov/


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