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Maximizing Federal Deposit Insurance Corporation (FDIC) coverage for your personal accounts

Recently, there have been many questions, and some confusion has arisen, regarding the best way to structure personal bank deposits for maximum financial security. Until October 3, 2008, if a depositor’s accounts at one FDIC–insured financial institution totaled $100,000 or less, in general the deposits were insured by the FDIC. As a part of the Emergency Economic Stabilization Act of 2008, the $100,000 FDIC insurance limitation was increased to $250,000 for the period beginning October 3, 2008, and ending December 31, 2009 (Temporary Increase Period). Because this increase is currently a temporary measure, it may be wise to continue to stay within the $100,000 limit. The good news is that it is possible to qualify for additional insurance coverage at an FDIC–insured financial institution as long as certain requirements are met. Deposits made under the following ownership categories can be insured separately:

1. Single accounts. A deposit account in one person’s individual name can be insured up to $100,000 ($250,000 during the Temporary Increase Period).

2. Joint ownership accounts. A deposit account that is titled jointly with rights of survivorship or as tenants in common can be insured for up to another $100,000 ($250,000 during the Temporary Increase Period). All co-owners must be individuals and have equal rights to withdraw funds from the account. Legal entities are not eligible for joint insurance coverage.

3. Revocable trust accounts. An account that is titled in the name of your revocable living trust is entitled to $100,000 of insurance coverage ($250,000 during the Temporary Increase Period) for each qualifying “owner to beneficiary” pair established in the trust. This coverage is based on the actual interest of each qualifying beneficiary as specified in the trust. The FDIC requires that the account title clearly indicate that the account is held pursuant to a trust. The beneficiaries of the trust do not have to be listed on the bank records. In addition, only a spouse, child, grandchild, parent or sibling can be a qualifying beneficiary. For example, assuming a $100,000 FDIC insurance limit, a $1 million revocable trust account that distributes $100,000 to each of four grandchildren and distributes the balance equally to two children at the owner’s death could be insured up to $600,000. Assuming the $250,000 FDIC insurance limit applies, a $2 million revocable trust account that distributes $250,000 to each of four grandchildren and distributes the balance equally to two children could be insured up to $1.5 million.

4. Pay on death accounts. A pay on death account is insured up to $100,000 ($250,000 during the Temporary Increase Period) per deposit owner for each qualifying beneficiary. The beneficiary must be a spouse, child, grandchild, parent or sibling. The beneficiaries must be identified by name on the account records of the bank. The FDIC places no limit on the number of qualifying beneficiaries that an account owner may designate. However, a qualifying beneficiary named on a pay on death account who is also the beneficiary of a revocable trust account held at the same financial institution cannot be counted twice for that beneficiary in order to obtain additional insurance coverage. Please note that a pay on death account which lists the account owner’s revocable living trust as the beneficiary will result in the deposit account being insured as the owner’s single account and aggregated with any other single account the owner has at the same institution, with the owner’s single accounts being limited to a combined maximum of $100,000 of coverage ($250,000 during the Temporary Increase Period). As a result, there is a benefit to titling an account in the name of your revocable trust rather than making the account pay on death to your revocable trust.

5. Irrevocable trust accounts. An irrevocable trust account is insured up to $100,000 ($250,000 during the Temporary Increase Period) for each beneficiary. However, per beneficiary coverage is only available when the beneficiary’s interest is a non-contingent trust interest. Unlike revocable trusts and pay on death accounts, any person or charity can be a beneficiary entitled to $100,000 of insurance coverage ($250,000 during the Temporary Increase Period). If the irrevocable trust has more than one grantor, then coverage is provided separately for the beneficiaries named by each grantor. A beneficiary who is also the beneficiary of a pay on death account or revocable trust account of the owner cannot be counted more than once for purposes of increasing the insurance coverage.

6. Retirement accounts. Individual retirement account deposits and certain other employee benefit plan accounts are insured separately up to a maximum of $250,000.

You should be aware that all deposits owned by the same depositor in the same ownership category are added together for the purpose of calculating FDIC insurance coverage. Another point to remember is that assets in a trust account for which a bank is serving as the trustee are not assets of the bank and must be segregated from the bank’s assets. These trust assets are not subject to the claims of the bank’s depositors or other creditors. In the event that a bank with trust powers fails, the FDIC will seek to transfer responsibility for the administration of the trust accounts to a successor trust institution.

The rules governing FDIC insurance coverage are somewhat complicated. In the event that you want to deposit more than $100,000 ($250,000 during the Temporary Increase Period) in one bank, you should work closely with your bank and consult with your attorney to structure your accounts in a manner that will satisfy the FDIC requirements.

As this issue was going to press, talk of further increasing the FDIC insurance limit was active in Washington. On October 14, 2008, the FDIC announced a new program to provide full deposit insurance coverage for non-interest bearing deposit accounts. This increased coverage will expire at the end of 2009 and financial institiutions may “opt out” of the expanded coverage after the first 30 days of the program. We will update you regarding any further developments in the next issue.

  • Partner

    June is a member of the Business Services Department. Her practice focuses on U.S. and state securities laws compliance, Sarbanes-Oxley Act and corporate governance issues, and financial institution regulatory matters. She ...

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