Fleming & Curti, P.L.C. - Depositor Insurance Rules Are Complicated, But Favorable

AUGUST 18, 2008 VOLUME 16, NUMBER 7

Depositor Insurance Rules Are Complicated, But Favorable

Recent news reports concerning the failure of California and Florida banks have prompted clients to call us with questions concerning the safety of bank and credit union accounts. More recently still, we have read (and sometimes heard rumors about) other banks which might have been labeled as "troubled." We think it is important for everyone to understand the account insurance rules, especially in the current uncertain environment.

Bank accounts are generally protected by The Federal Deposit Insurance Corporation (FDIC), while credit union members are covered through the National Credit Union Administration (NCUA). Deposits are usually insured up to a maximum of $100,000 in both cases. There are similarities between the two kinds of coverage, but there are also important differences.

The FDIC and NCUA insure checking, savings, NOW accounts, certificates of deposit, money market accounts regular share accounts, draft share accounts, and share certificates at member banks, savings and loans and credit unions. The FDIC and NCUA do not insure mutual funds, stocks and bonds, life insurance policies or annuities, even if you purchased them from your bank or credit union.

The basic FDIC and NCUA insurance covers your deposits on account, up to $100,000. If you have more than $100,000 on account at a failed bank or credit union, you may still be eligible for full coverage if you own accounts in more than one category.

Individual accounts are insured up to a maximum of $100,000. The balances in every individual account you own at a failed institution will be aggregated, and the total will be insured, up to $100,000.

Joint accounts are insured up to a maximum of $100,000 per owner. The balances of every joint account you own will be aggregated and divided by the number of owners. In order to qualify for this insurance, every owner of the joint account must have equal rights to withdraw funds from the joint account, and the names of every joint owner must be reflected on signature cards or other bank records.

The FDIC and the NCUA have slightly different approaches to retirement accounts. Bank retirement accounts (including traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, Section 457 deferred compensation plans, self-directed defined contribution plans, and self-directed KEOGH accounts) are insured up to $250,000 total. This does not apply to 403 (b) retirement accounts, Medical Savings Accounts, or Coverdell Education Savings Accounts. The balances in qualifying retirement accounts will be aggregated, and the total will be insured, up to $250,000. You cannot increase your insurance coverage by naming beneficiaries on these accounts.

Retirement accounts at credit unions are more complicated. Coverage is provided for IRAs (traditional and Roth) up to $250,000 and, separately, another $250,000 in coverage is available for KEOGH and Coverdell Education Savings Accounts.

A "payable on death" account (or similar arrangement) is covered up to $100,000 per account owner, per beneficiary – in other words, an account held in your name with a POD designation naming your two children could be covered up to a total of $300,000. This coverage is only available if the beneficiary is clearly identifiable from bank records, and has a family relationship with you (spouse, parent, child, grandchild, or sibling). Still, this arrangement can significantly increase the amount of depositor insurance in an individual case.

If you have an account in the name of your Revocable Living Trust, insurance coverage may be available for up to $100,000 per account owner, per beneficiary. As with the "payable on death" accounts described above, the beneficiary must be among a certain category of family members in order for the insurance to apply, and the account must be in the name of the trust, rather than in your name alone. Additionally, beneficiaries must be entitled to their share of trust assets upon the death of the last living Trustor, without having to satisfy any other contingency. Trust beneficiaries must be clearly identified in trust documents, but their names need not appear on the bank or credit union account records.

Irrevocable Trust Accounts are treated differently from revocable ones. Your revocable living trust may become irrevocable upon the death of one of the Trustors, or it may split into two trusts, one revocable and one irrevocable, upon the death of the first Trustor. Irrevocable trust accounts are insured up to a maximum of $100,000, but an enhanced coverage of up to $100,000 per account owner, per beneficiary, may apply. Unlike revocable trusts, the beneficiaries of an irrevocable trust need not be family members in order to qualify for the per owner / per beneficiary coverage. This means that a friend, domestic partner, niece or nephew, or charity whose interest would not have been insured while the trust was revocable, will be covered if the trust is irrevocable. Note however, that the per owner / per beneficiary coverage is not available if the trustee retains the power to use trust principal, for example, to pay the medical expenses of the Trustor's surviving spouse. In such a case (and we think it's likely that this will be the majority of cases), the irrevocable trust account will only be insured up to a maximum total of $100,000. These rules are more complicated than those covering many other types of accounts.

If you hold an account as a fiduciary for someone else – as a custodian, guardian, conservator, agent, or nominee, or as the executor (personal representative) of an estate, the account balances are insured as the individual accounts of the ward, minor, decedent or principal, and not of the fiduciary. This will protect the beneficiary’s assets up to $100,000, but will not increase the coverage by virtue of the fiduciary relationship.

As you can see, the account coverage rules are complicated. The good news: they are generally more favorable than most depositors realize. Coverage is not limited to the $100,000 often thought to be the maximum available.

What does this mean in practice? It may mean that it is not necessary to distribute deposits among many financial institutions in order to secure coverage. It may also mean that "payable on death" designations, or revocable living trusts, may be more attractive for larger depositors as a means of increasing the total insurance coverage.

Do you need more information? Check out the FDIC website or our own "Frequently Asked Questions" section on bank account insurance.

Even with better depositor coverage than you thought you had, you probably will want to monitor the health of individual banks. Unfortunately, the FDIC website (and public information) does not help locate troubled banks.