Small Business Taxes & ManagementTM--Copyright 2008, A/N Group, Inc.
This article has not been updated to reflect the new $250,000 insurance limit in the Emergency Economic Stabilization Act of 2008. The temporary $250,000 limit (up from $100,000) is to be in effect from October 3, 2008 (date of enactment) through December 31, 2009.
With the current worry about the solvency of banks, many bank customers are questioning whether or not they're insured and for how much. This discussion isn't intended to cover all possible questions, just the ones you've most frequently asked.
FDIC insurance covers all deposits at an insured bank. (Credit unions are not covered. But they have their own insurance. See below.) That includes checking, savings, certificates of deposit, and money market deposit accounts. Mutual funds, bonds, etc. purchased at an FDIC insured bank are NOT covered. The basic insurance coverage is $100,000 per depositor, per insured bank. All amounts in the bank are insured; the amount of your deposit and any interest that's been earned. That means you can be covered for additional amounts (another $100,000) for each insured bank. Putting deposits in separate branches of the same bank won't increase your coverage. In addition, retirement funds, including traditional IRAs, Roth IRAs, SEPs, SIMPLE plans, Section 457 deferred compensation plan accounts, self-directed defined contribution plans (including 401(k) plans), self-directed money purchase plans and self directed Keogh plan accounts (for self-employed individuals) owned by the same person are insured up to $250,000. Coverdell Education Savings Accounts, Health Savings Accounts (HSAs), Medical Savings Accounts, Section 403(b) plans and defined-benefit plans don't qualify for the $250,000 coverage limit. (The term self-directed in this context means plan participants have the right to direct how the money is invested, including the ability to direct that the deposits be placed in an FDIC-insured bank.)
Ownership and the $100,000 Limit
If all you've got in a particular bank is no more than $100,000 between all your accounts, you don't have to worry. But it's not unusual to have several accounts under different names or forms of ownership. In some cases you may be covered for more than $100,000; in some cases not. And this is where it becomes tricky.
Deposits in the same bank under different categories of legal ownership can be separately insured. For example, you have $100,000 in a savings account under your name, Fred Flood. You are the sole shareholder of a corporation, Fred Flood, Inc. which has $85,000 in the same bank. Both accounts are fully insured. Your wife, Sue, has $100,000 in a savings account in the same bank. She has a consulting business and operates as a sole proprietorship, Sue Flood, Consultant and has $65,000 in the same bank. Her business is not considered a separate entity, so she is only insured for $100,000; the remaining $65,000 is uninsured.
These accounts all constitute single ownership with one $100,000 limit. For example, Fred Flood has a $90,000 account in his own name. A custodial account set up by his mother some years ago in his name has $25,000. The combined amount of $115,000 is over the limit by $15,000.
Note that all accounts for a decedent's estate qualify as a single ownership. For example, you're the executor for your father, Fred Flood. You gather the amounts from his checking, savings etc. accounts into a single account at Madison Bank. The total amounts to $85,000. You sell some stock and deposit the $65,000 in proceeds into that account. The total, $150,000, is over the limit by $50,000. It makes no difference that there are six beneficiaries of the estate.
In a joint account the deposit is owned by two or more people. Each co-owner's share of every joint account is added to the co-owner's other shares in the bank to determine the insured amount. Legal entities such as corporations, partnerships, LLCs, trusts, etc. are not eligible for joint account coverage. In order to qualify under the joint account rules, all co-owners must have equal rights to withdraw funds from the account. All co-owners must sign the deposit account signature card unless the account is a CD or is established by an agent, nominee, guardian, custodian, executor or conservator. Varying the names on the accounts, will not increase the amount of coverage. For example, setting up three accounts as "Sue or Fred", "Sue and Fred", and "Fred and Sue" won't increase coverage.
Here are some examples:
Example 1--Fred Flood and his sister, Sue Field have two joint accounts at Madison bank. The first account is titled "Fred Flood and Sue Field" with Fred's social security number on the account. The account has $115,000 in it. the second account is titled "Sue Field and Fred Flood" with Sue's social security number. This account has $120,000 in it. For insurance purposes, Fred has half of his account, $115,000 ($57,500) and half of Sue's account, $120,000 ($60,000) for a total of $117,500. Sue as a like amount made up of $60,000 from her account and $57,500 from Fred's account. Both of them are at risk for $17,500.
Example 2--Fred Flood and Sue Field have a joint account at Madison Bank totaling $140,000. Fred, Sue, and Ken have a joint account for $90,000 at the same bank. Fred has an account solely in his own name at the bank for $20,000. For insurance purposes here are totals for each individual:In the two examples above, we've assumed that each co-owner's share was equal. That's what the FDIC assumes unless the deposit records state otherwise.Account Fred/Sue Fred/Sue/Ken Fred Total Fred $70,000 $30,000 $20,000 $120,000 Sue 70,000 30,000 100,000 Ken 30,000 30,000 Total $140,000 $90,000 $20,000Fred has $120,000 in the bank, but is covered for only $100,000, so $20,000 is uninsured. Sue has just $100,000 in the bank so she is not at risk.
Tip--In the most common situation a husband and wife have multiple accounts in the same bank. A joint checking account, a joint savings account, and probably individual savings accounts for each. If the four accounts total more than $200,000, you're most likely at risk for a portion of your deposits. More often than not, that happens by accident. You sell your vacation home, receive an inheritance, etc. and deposit the proceeds temporarily in your checking or savings account.
Revocable Trust Accounts
A revocable trust account is an account owned by a grantor, settlor, or trustor who deposits amounts into the account where the funds are payable automatically on the death of the grantor to the named beneficiaries. It's revocable because the amounts can be withdrawn at any time by the grantor. (For income tax purposes, any income generated is taxable to the grantor.) For these purposes trusts can be formal (a written agreement that may contain other assets besides those in the bank) or informal. Informal trusts usually take the form of payable-on-death (POD) or in trust for (ITF) accounts and are designated by indicating so on the bank's signature card. In both cases the trust becomes irrevocable on the death of the grantor.
The FDIC adopted interim new rules on September 26, 2008. The commentary below is based on these interim rules. The payable-on-death (POD) account is the simplest and most common. The owner of the account is insured for up to $100,000 for each beneficiary. However, two requirements must be met:
The old rule requiring the beneficiary to be a "qualifying beneficiary" no longer applies.
Under the new rules, a trust account owner with up to $500,000 in revocable trust accounts at one FDIC-insured institution is insured up to $100,000 per beneficiary. (This is the rule that will apply to the vast majority of revocable trust account owners.) Revocable trust account owners with more than $500,000 and more than five different beneficiaries named in the trust(s) are insured for the greater of either: $500,000 or the aggregate amount of all the beneficiaries' interests in the trust(s), limited to $100,000 per beneficiary.
Under the interim rule, coverage is based on the existence of any beneficiary named in the revocable trust, as long as the beneficiary is a natural person, or a charity or other non-profit organization. As mentioned above, under the interim rule the concept of "qualifying beneficiaries" is eliminated. For an account owner with combined revocable trust account balances of $500,000 or less, the maximum available coverage would be determined simply by multiplying the number of beneficiaries by $100,000. A key component of the interim rule is the ability to determine coverage available to account owners without regard to unequal interests of the beneficiaries named in the revocable trust(s).
A living trust account with a balance of $400,000, for example, would be insured for up to $400,000 as long as there are at least four beneficiaries named in the trust. Different proportional ownership interests of the beneficiaries in the trust assets would not affect the deposit insurance coverage. So, in this example, the maximum coverage would be $400,000 even if the trust provided that beneficiaries A and B are entitled to twenty percent each of the trust assets and beneficiaries C and D are entitled to thirty percent each of the trust assets. As under the current rules, however, a depositor would receive a combined maximum coverage amount of $100,000 for the same beneficiary named in more than one revocable trust account he or she owns at one insured institution.
To eliminate this complexity and the confusion it generates, under the interim rule, the rules for determining the coverage of the living trust account will remain the same when the trust (or part of the trust) converts to an irrevocable trust (e.g., when the grantor dies).
Living or Family Trust Accounts
Things get more complicated with living or family trusts. Because the situation is more complex and less frequently encountered, we'll only deal in generalities here. Basically, the same rule as to $100,000 per owner for each named beneficiary applies if the account title indicates a living trust, family trust, or similar language and the beneficiaries are qualifying as described in the Revocable Trust Account discussion, above. Here contingent or alternate trust beneficiaries are not considered as having an interest in the trust as long as the primary beneficiaries are alive. (There is an exception for a revocable living trusts with a life estate interest.)
Irrevocable Trust Accounts
Irrevocable trusts are often created by a grantor with one or more beneficiaries. Assets put into an irrevocable trust cannot be taken back by the grantor. In addition, the trust cannot be changed or canceled by the grantor. The income and estate tax consequences are significantly different than for a revocable trust. A revocable trust becomes irrevocable on the death of the grantor. The coverage is similar to a revocable trust, that is, the interests of the beneficiaries in all accounts created by the same grantor are added together and covered up to $100,000. The coverage applies only if the bank records disclose the trust relationship, the beneficiaries and their interests in the trust are identifiable in the bank records, each beneficiary's interest is not contingent, and the trust is valid under state law. If the trust agreement provides that a trustee may invade the principal, the $100,000 per beneficiary rule does not apply.
We strongly suggest you seek advice from your attorney and/or financial adviser to determine if you're covered in this situation.
As long as you understand the basics above, you're unlikely to run afoul of the $100,000 limits when setting up an account. Problems arise when interest income increases the amount, you deposit proceeds from asset sales, annuity distributions, an inheritance, etc. into the account. Don't forget to check amounts in your spouse's accounts if you have any co-owned accounts. Individuals living in rural areas should be particularly careful, since there are usually less banks. Consider putting funds not readily needed (e.g. CDs, long-term savings) into non-local banks and save the local bank for convenience--checking accounts, emergency funds, etc.
If your total deposits in the bank are not too high, you may be able to increase your coverage by just adding a name to the account. For example, Fred and Sue are saving for a house. They live on Fred's salary; save all of Sue's. Fred has $15,000 in his accounts; Sue has $125,000 in her's. If Sue adds Fred's name to the account, they'll be fully covered.
Another option is to ask your bank about Certificate of Account Registry Service (CDARS) for extra insurance on CDs. Your local bank takes the deposits and spreads it for you in other banks. The service is free, but available at only about a quarter of the banks.
Is all lost should your bank fail when your account totals $110,000? Probably not. While not something to rely on, smaller amounts over the limit have frequently been covered, at least in part. Thus, insurance will cover the first $100,000; bank assets will probably cover most of the additional $10,000. As the excess amount gets larger, a smaller percentage is likely to be covered. In addition, at least one state will insure excess deposits.
For more information, go to the FDIC site at www.fdic.gov.
The discussion above applies to FDIC insured banks. Credit unions are not insured by the FDIC. Most credit unions carry insurance from the National Credit Union Share Insurance Fund (NCUSIF), which is backed by the full faith and credit of the U.S. Government. The rules are similar to those for FDIC insurance described above. For more general information on credit unions, go to www.ncua.gov. For specific information on insurance coverage on accounts, go to www.ncua.gov/ShareInsurance/index.htm.
Copyright 2008 by A/N Group, Inc. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is distributed with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional should be sought. The information is not necessarily a complete summary of all materials on the subject.--ISSN 1089-1536
--Last Update 10/03/08