Jay A. Brett, one of Craig Hersch’s law partners, writes today’s article focusing on FDIC insurance. He has practiced in Lee County over 35 years, with an emphasis on real estate transactions and banking law. Mr. Brett sits on the Board of Directors of Florida Gulf Bank, in Fort Myers.

Over the past two weeks, FDIC insurance has received prominent mention in television news and newspapers in connection with the subject of impending banking doom.  While many people have a basic understanding of the concept of FDIC insurance, not many are familiar with the specific rules laid out by the federal government and how those rules might apply to your individual accounts.  This article is an attempt to help demystify those rules. 

The “FDIC” – short for Federal Deposit Insurance Corporation, is an independent agency of the United States government formed to protect depositors against the loss of their insured deposits if an insured bank should fail.  FDIC insurance is backed by the full faith and credit of the United States Government. 

The term “insured bank” means any bank or savings association that has obtained FDIC insurance coverage.  To determine whether your bank is FDIC insured, you have several options:  (1) call 1-(877) 275-3342;  (2) go on your computer to www.fdic.gov/deposit and use the “Bank Find” tab; or  (3) simply look for the official FDIC sign posted at your bank. 

FDIC insurance covers all types of deposits at an insured bank including, checking and NOW accounts, savings accounts, money market deposit accounts, and time deposits such as CD’s. 

What’s Not Insured

FDIC insurance does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if these investments were bought from an insured bank.  While it is relatively easy to grasp the concept that FDIC insurance provides an aggregate of $100,000 coverage per each depositor, per each insured bank, like many things, “the devil is in the details”. 

First, the previous statement is not entirely true.  Certain types of retirement accounts (discussed later) are insured up to an aggregate of $250,000 per owner per insured bank.  So there is already one exception to the rule.  The tricky part comes when one considers that deposits maintained at banks may be maintained in different categories of legal ownership at the same bank, and therefore are separately insured. 

Number of Depositors

In addition, the definition of “depositor” can mean more than one person, such as a husband and wife (2 depositors), or a husband and wife and each of their children (3 depositors).  Therefore, it is possible to maintain deposits of much more than $100,000 at one insured bank and still be fully insured. 

For example, a joint account may be insured for $100,000 in each joint owner’s name if the following conditions are met:  (a) all co-owners must be “people” (as opposed to legal entities such as corporations, LLCs, trusts, estates, or partnerships);  (b) all co-owners must have equal rights to withdraw deposits from the account; and  (c ) all co-owners must sign the deposit account signature card (unless the account is a CD or is established by an agent or fiduciary). 

If all of these requirements are met, each co-owner’s share of every account that is held at the same insured bank is added together with the co-owner’s other accounts, and the total for each co-owner is insured up to $100,000.  For example, John Doe, Mary Doe, and their son, Richard, could be joint account co-owners and have insurance up to an aggregated $300,000 as long as they have no other accounts at the same bank.  If they do, every account in which they have an interest at that bank, either as owner, co-owner, or trust beneficiary, is aggregated and counted as part of their insured $100,000.  As you can imagine, this can become quite confusing. 

Accounts Owned by Trusts

FDIC has also addressed accounts owned by both revocable and irrevocable trusts.  For revocable trusts, the rules can get tricky in a hurry, especially where the beneficiaries’ shares are unequal.  However, in general, all deposits which an owner has in both “informal” trusts (i.e. “ITF” accounts or “POD” accounts) and “formal” trusts (i.e. a “living” or “family’ trust written for estate planning purposes) are added together for FDIC insurance purposes, and the $100,000 insurance limit is applied to each beneficial interest.

In order to “qualify” for insurance a trust, whether formal or informal, must meet the following requirements:  (a) the account title must include a commonly accepted term such as “payable on death” (POD), “in trust for” (ITF), “as trustee for”, or similar language to indicate the existence of a trust relationship;  (b) the beneficiaries must be identified by name in the deposit account records of the bank (note here that banks many times fail to do this and now must become diligent in doing so); and  (c) the beneficiaries must be “qualifying” meaning that they must be a spouse, child (including adopted child or step-child), grandchild, parent, or sibling of the Grantor.  Nieces, nephews, cousins, friends and organizations do not qualify. 

A qualified beneficiary who has a life income interest also counts as a separate qualifying beneficiary.  For example, if John Doe sets up a trust account at his bank, and both the trust document and the bank records reflect that his wife, Mary, is to receive a lifetime income interest, and upon her death, the account is divided in equal shares among their three (3) children, then the account is insured for $400,000 (presuming neither Mary nor her children have no other insured accounts at that bank) – i.e. $100,000 for John’s wife, and $100,000 for each of John’s three (3) children.  John himself may have another $100,000 at the same bank which would also be insured.  However, no part of the actual trust account is insured in John’s name since he is only the Grantor of the trust, not a beneficiary.

The rules for irrevocable trust accounts can be equally tricky.  An irrevocable trust is determined by the fact that the owner no longer has the power to revoke or change its terms.  The rule for irrevocable trusts is that the interests of a beneficiary and all deposit accounts established by the same grantor and held at the same insured bank are added together and insured up to $100,000, if all of the following requirements are met:  (a) the bank’s deposit records disclose the existence of the trust relationship;  (b) the beneficiaries and their interests in the trusts must be identifiable from the bank’s deposit account records or from the trustee’s records;  (c) the amount of each beneficiary’s interest must not be contingent; and  (d) the trust must be valid under state law.  Note that for irrevocable trusts, a beneficiary does not have to be “qualifying”, i.e. not related to the Grantor in order to obtain insurance coverage.  This is the major difference between revocable trusts and irrevocable trusts.

Retirement Trusts

Had enough yet?  Well, the rule for retirement accounts can be even trickier.  Generally, the following types of retirement plan deposits qualify for FDIC coverage:  (i) all types of IRAs, including traditional IRAs, Roth IRAs, SEP IRAs, and “SIMPLE” IRAs;  (ii) all section 457 deferred compensation plan accounts provided by state and local governments;  (iii) self-directed defined contribution plan accounts such as 401-k plans (whether self-directed or not);  (iv) self-directed Keogh (HR-10 Plan accounts).  All retirement accounts of the type covered which are owned by the same person in the same FDIC insured bank are added together and the total is insured up to $250,000.

Note here that being named as a beneficiary on a retirement account does not expand deposit insurance coverage as it does for trust accounts.  Some types of retirement accounts which are not eligible for FDIC insurance are Coverdell Educational Savings accounts, health savings accounts, and medical savings accounts, as well as Section 403(b) accounts.

Simple right?  You can be assured that it is not.  However, the federal government has tried valiantly to explain these rules in plain English on its website www.fdic.gov.  If you are interested in learning more, you are invited to go to that website and click on the tab for “deposit insurance” and then scroll down to “insuring your deposits (basic guide)”.  There you will find much of the information used in this article, as well as more in depth explanations and examples of each type of insured account.  The government’s website contains many other useful tools including an “electronic deposit insurance estimator” which you can use to determine your coverage if you have more than $100,000 in deposit accounts at any insured bank.

Warning

If your banker is telling you that you should break up your trust account deposits into joint accounts or POD or ITF accounts, he or she may be doing you a tremendous disservice.  Breaking up trust accounts could have the effect of thwarting or even destroying your estate plan, and could create adverse gift tax consequences and adverse creditor and bankruptcy consequences.  If you find yourself in such a dilemma, you should contact your estate planning attorney to get more details and to devise a workable plan.

©2008 Craig R. Hersch .Learn more at www.sbshlaw.com