Thursday, October 9, 2008

FDIC Insurance Tricks - Coverage Far Greater than the $250,000 limit

FDIC: The more you know, the safer your money.

The Government Raising FDIC coverage from $100,000 to $250,000 was a very good thing -- but did you know there were many ways to get coverage at far greater cumulative levels?

The below is taken from the FDIC WEBSITE and explains perfectly legitimate and government sanctioned ways to dramatically increase your coverage - and without opening accounts at different banks all across town.

Is it possible to have more than $250,000 at one insured bank and still be fully covered?

You may qualify for more than $250,000 in coverage at one insured bank or savings association if you own deposit accounts in different ownership categories. The most common account ownership categories for individual and family deposits are single accounts, joint accounts, revocable trusts accounts and certain retirement accounts.

What is a single account?

This is a deposit account owned by one person and titled in that person's name only, with no beneficiaries. All of your single accounts at the same insured bank are added together and the total is insured up to $250,000. For example, if you have a checking account and a CD at the same insured bank, and both accounts are in your name only, the two accounts are added together and the total is insured up to $250,000. Note that retirement accounts and eligible trust accounts are not included in this ownership category.

What is a joint account?

This is a deposit account owned by two or more people and titled jointly in the co-owners' names only, with no beneficiaries. If all co-owners have equal rights to withdraw money from a joint account, a co-owner's shares of all joint accounts at the same insured bank are added together and the total is insured up to $250,000. Note that jointly owned revocable trust accounts are not included in this ownership category.

If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $250,000 per owner, providing up to $500,000 in coverage for the couple's joint accounts.

Example: John and Mary have three joint accounts totaling $600,000 at an insured bank. Under FDIC rules, each co-owner's share of each joint account is considered equal unless otherwise stated in the bank's records. John and Mary each own $300,000 in the joint account category, putting a total of $100,000 ($50,000 for each) over the insurance limit.

Joint Account Example
Account Title Type of Deposit Account Balance
Mary and John Smith Checking $50,000
John or Mary Smith Savings $150,000
Mary Smith or John Smith CD $400,000
Total Deposits $600,000

Insurance coverage for each owner is calculated as follows:
Account Holders Ownership Share Amount Insured Amount Uninsured
John $300,000 $250,000 $50,000
Mary $300,000 $250,000 $50,000
Total $600,000 $500,000 $100,000

  • Mary's ownership share in all joint accounts equals $300,000 [1/2 of the checking account ($25,000), 1/2 of the savings account ($75,000), and 1/2 of the CD ($200,000), for a total of $300,000]. Since her coverage in the joint ownership category is limited to $250,000, $50,000 is uninsured.
  • John's ownership share in all joint accounts is the same as Mary's, so $50,000 is uninsured.

What is meant by certain retirement accounts?

These are deposit accounts owned by one person and titled in the name of that person's retirement plan. Only the following types of retirement plans are insured in this ownership category:

  • Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs
  • Section 457 deferred compensation plan accounts (whether self-directed or not)
  • Self-directed defined contribution plan accounts
  • Self-directed Keogh plan (or H.R. 10 plan) accounts

All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. For example, if an individual has an IRA and a self-directed Keogh account at the same bank, the deposits in both accounts would be added together and insured up to $250,000.

Note: Naming beneficiaries on a retirement account does not increase deposit insurance coverage.

What is a revocable trust account?

This is a deposit account held as a payable on death (POD) or in trust for (ITF) account or that is established in the name of a formal revocable trust (also known as a living or family trust account).

POD and ITF accounts — also known as testamentary or Totten Trust accounts — are the most common form of revocable trust deposits. These informal revocable trusts are created when the account owner signs an agreement — usually part of the bank's signature card — stating that the deposits will be payable to one or more beneficiaries upon the owner's death.

Living trusts — or family trusts — are formal revocable trusts created for estate planning purposes. The owner of a living trust controls the deposits in the trust during his or her lifetime. The trust document sets forth who shall receive trust assets after the death of the owner.

Deposit insurance coverage for revocable trust accounts is provided to the owner of the trust. However, the amount of coverage is based on the number of beneficiaries named in the trust and, in some cases, the interests allocated to those beneficiaries, up to the insurance limit. A trust beneficiary can be an individual (regardless of the relationship to the owner), a charity or another non-profit organization (as defined by the IRS).

Revocable trust coverage is based on all revocable trust deposits held by the same owner at the same bank, whether formal or informal. If a revocable trust account has more than one owner, each owner's coverage is calculated separately, using the following rules:

  • Revocable Trust Deposits with Five or Fewer Beneficiaries — Each owner's share of revocable trust deposits is insured up to $250,000 for each beneficiary (i.e., $250,000 times the number of different beneficiaries), regardless of actual interest provided to beneficiaries.
  • Revocable Trust Deposits with Six or More Beneficiaries — Each owner's share of revocable trust deposits is insured for the greater of either (1) coverage based on each beneficiary's actual interest in the revocable trust deposits, with no beneficiary's interest to be insured for more than $250,000, or (2) $1,250,000.

Note: Determining coverage for living trust accounts that have six or more beneficiaries and provide different interests for the trust beneficiaries can be complicated. Contact the FDIC at 1-877-275-3342 if you need assistance in determining the insurance coverage of your revocable trust.

POD Account Example: This example applies to POD accounts only. (Coverage may be different for some living trusts.) Bill has a $250,000 POD account with his wife Sue as beneficiary. Sue has a $250,000 POD account with Bill as beneficiary. In addition, Bill and Sue jointly have a $1,500,000 POD account with their three children as equal beneficiaries.

Account Title Account Balance Amount Insured Amount Uninsured
Bill POD to Sue $250,000 $250,000 $0
Sue POD to Bill $250,000 $250,000 $0
Bill and Sue POD to 3 children $1,500,000 $1,500,000 $0
Total $2,000,000 $2,000,000 $0

These three accounts totaling $2,000,000 are fully insured because each owner is entitled to $250,000 of coverage for each beneficiary. Bill has $1,000,000 of insurance coverage because he names four beneficiaries — his wife in the first account and his three children in the third account). Sue also has $1,000,000 of insurance coverage $250,000 for each of her beneficiaries — her husband in the second account and her three children in the third account.

When calculating coverage for revocable trust accounts, keep in mind that:

  • Coverage is based on the number of beneficiaries (and, if the account has six or more beneficiaries, the interests of the beneficiaries) named by each owner. Additional coverage is not provided for the trust owner(s). For example, if a father owns a $750,000 POD account naming his two sons as beneficiaries, the account is insured for $500,000 — $250,000 for the interest of each beneficiary. The remaining $250,000 is uninsured.
  • FDIC insurance limits apply to all revocable trust deposits — including all POD/ITF and living trust accounts — that a trust owner has at one insured bank. In applying the $250,000 per beneficiary insurance limit, the FDIC combines an owner's POD accounts with the living trust accounts that name the same beneficiaries at the same bank.