As the climate continues to deteriorate in the US and world credit markets,  I am receiving more and more calls from clients, some of whom are relatively sophisticated investors, wanting to know how much FDIC coverage they actually have for their CDs and other accounts at their various banks.  The answer is not always easy to provide, because the rules are anything but clear in some cases.



The concerns arise out of the general economic malaise, the mortgage crisis and the current rate of bank failures across the U.S.  Through last Friday, eight banks have been taken over by the FDIC so far this year, compared to only three in all of 2007, and none in 2005 or 2006.

For those who are worry about the safety of their bank deposits, the current economic conditions feed those worries.  The most recent bank failurewas last Friday (8/22/08), when regulators closed the Columbian Bank & Trust Co., of Topeka, Kansas.  About $46 million of the bank's $622 million in deposits may have exceeded insurance limits, according to the FDIC.

Before I get into the cumbersome task of deciphering the FDIC rules on what is insured and what isn’t.  I want to discuss some options that may be of interest to those who may not want to stumble through the maze of FDIC insurance coverage, especially where their revocable living trust may be concerned.

There are a number of banks that now participate in a program called “Certificate of Deposit Account Registry Service”  –  CDARS.  Through CDARS a bank customer can obtain FDIC insurance for up to $50 million in certificates of deposit.  When the funds are deposited with the local participating bank, and that host bank immediately transfers the funds to other participating banks so that each bank has less than $100,000 on deposit for that customer.  There is no charge for the service, but the returns typically are slightly less than the individual CD rates for the individual participating banks.   The CDARS program is operated by Promontory Interfinancial Network, LLC.  Banks from all fifty states, including the District of Columbia participate in CDARS.  To review a list of the participating banks in Florida you can go to the CDARS website.

Synovus Financial Corp., provides a similar service through their wholly owned and affiliate banks.  Synovus can spread up to $35 million, similar to the CDARS process, among its banks and all of the deposits will be fully insured by FDIC deposit insurance.

If you opt for the CDARS or Synovus solution to the FDIC insurance coverage problem, then you may want to skip the remainder of this entry.  Next I am going to discuss how to determine what amount of your deposit accounts are covered by FDIC insurance.

FDIC Deposit Insurance Coverage Limits

The basic FDIC rule is that each individual’s collective accounts at a single bank are insured up to $100,000.  There are a myriad of rules that apply to modify that basic rule depending on the type of “ownership” involved and the titling of the accounts at the bank.  More specific information can be obtained at the FDIC website.

The FDIC recognizes several different “ownership” categories: (1) Single Accounts; (2) Certain Retirement Accounts; (3) Joint Accounts; (4) Revocable Trust Accounts; (5) Irrevocable Trust Accounts, (6) Employee Benefit Plan Accounts; (7) Corporation/Partnership/Unincorporated Association Accounts; and (8) Government Accounts.  We’re only going to discuss those that involve individuals, retirement accounts, and trusts – both revocable and irrevocable.

Single Accounts

Single accounts are deposits owned by one person.  The following are included:

• Accounts held in one person’s name alone

• Accounts established for one person by an agent, nominee, guardian, custodian, or conservator, including Uniform Transfers to Minors Act accounts, escrow accounts, and brokered deposit accounts.

• Accounts held in the name of a business that is a sole proprietorship (d/b/a)

• Accounts established for a decedent’s estate, and

• Any account that fails to qualify for coverage under another ownership category.

All single accounts owned by the same person at the same insured bank are added together and the total amount insured is $100,000.

Joint Accounts

A joint account is a deposit account owned by two or more people.  The following requirement must be met:

• All co-owners must be people.  Legal entities, such as corporations, limited liability companies (except disregarded entities), or partnerships are not eligible for joint account coverage.

• All co-owners must have equal rights to withdraw deposits 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.

If all of these requirements are met, each co-owner’s share of every account that is jointly held at the same insured bank is added together with the co-owner’s other shares, and the total is insured up to $100,000.  The FDIC assumes that all co-owners’ shares are equal unless the deposit account records state otherwise.

Certain Retirement Accounts

These are deposit accounts owned by one person, and titled in the name of that person’s retirement account.  These accounts are considered “certain retirement accounts” and qualify for increased deposit insurance coverage:

• All Section 457 deferred compensation plan accounts
• Self-directed defined contribution plan accounts, such as self-directed 401(k) plans, self-directed SIMPLE held in the form of a 401(k) plans, self-directed defined contribution money purchase plans, and self-directed defined
  contribution profit-sharing plans
• Self-directed Keogh plan accounts (H.R. 10 plan accounts) designed for self-employed individuals.

All such retirement accounts, owned by the same person, in the same FDIC insured bank, are added together and the total is insured up to $250,000.

Naming beneficiaries on a retirement account does not increase the deposit insurance coverage.  Education IRAs, Health Savings Accounts and Medical Savings Accounts are not included in this ownership category.  Accounts established under Section 403(b) are not eligible for the increased coverage.

Revocable Trust Accounts

Here’s where the rules get more complicated.  In short, accounts titled in the name of a revocable trust are eligible for FDIC insurance up to $100,000 per qualified beneficiary of the trust.  The “owner” of the revocable trust account is the grantor(s) of the trust.  The owner receives the insurance coverage. 

Each owner of the revocable trust is entitled to deposit insurance coverage up to $100,000 for each qualifying beneficiary.  For instance, if a revocable trust account was a joint account between husband and wife, and named their three children as beneficiaries, each owner (husband and wife) would have three beneficiaries with $100,000 of coverage, so that each owner has $300,000 of insurance coverage, for a total of $600,000 of insurance coverage for the account.  The owner could have other insurance coverage, as well.  Each owner would have coverage for an additional $100,000 per qualified beneficiary for any other revocable trust accounts owned by the owners   For instance, if, in addition to the children’s account, the husband owned a revocable trust account account naming his wife as the beneficiary, then he would have insurance coverage for up to $100,000 for that account as well.

A “qualifying” beneficiary includes the owner’s spouse, child, grandchild, parent, or sibling.  Adopted and step children, grandchildren, parents, and siblings also qualify.  Nieces, nephews, friends, organizations, including charities, and trusts do not qualify.

The definition of “beneficiary” is not as broadly defined by the FDIC as it is for legal purposes.  While the owners of the trust may be lifetime beneficiaries of the trust, as is typically the case with a revocable living trust, they are not considered beneficiaries for the purpose of calculating deposit insurance coverage.  Beneficiaries for purposes of insurance coverage calculation are those identified by the owner to receive an interest in the trust assets when the last owner dies.

It may be more difficult to determine the amount of coverage for a revocable living trust that with other forms of revocable trust agreements such as POD accounts.  Tthe revocable living trust typically identifies multiple beneficiaries, who may have unequal or dissimilar interests in the trusts.

When the requirements for the insurance coverage for a revocable trust are not met, then the trust owned accounts will be treated as if they were individually owned by the owners of the trust for FDIC insurance purposes.

The $100,000 per beneficiary insurance limit applies to all formal and informal revocable trust accounts that an owner has at the same bank.

Irrevocable Trusts

Irrevocable trust accounts are deposits held by a trust established by statute or a written trust agreement in which the grantor (the creator of the trust – also referred to as a trustor or settlor) contributes deposits or other property and gives up all power to cancel or change the trust.

Very importantly, where FDIC insurance coverage is involved, an irrevocable trust may come into existence upon the death of an owner of a revocable trust. The reason is that the owner no longer can revoke or change the terms of the trust. If a trust has multiple owners and one owner passes away, the trust agreement may call for the trust to split into an irrevocable trust and a revocable trust owned by the survivor. A very typical planning device often used by estate planning attorneys.  Because these two trusts are held under different ownership types, the insurance coverage may be very different, even if the beneficiaries have not changed.
The interests of a beneficiary in all deposit accounts established by the same grantor and held at the same insured bank under an irrevocable trust are added together and insured up to $100,000, only if ALL of the following requirements are met:

• The insured bank's deposit account records must disclose the existence of the trust relationship.
• The beneficiaries and their interests in the trust must be identifiable from the bank's deposit account records or from the trustee's records.
• The amount of each beneficiary's interest must not be contingent as defined by FDIC regulations.
• The trust must be valid under state law.

Note: A beneficiary does not have to be related to the grantor to obtain insurance coverage under the irrevocable trust account category as is the case with a revocable trust.

If the grantor retains an interest in the trust, the amount of the grantor's retained interest would be added to any single accounts owned by the grantor at the same bank and the total insured up to $100,000. For this situation to exist, the grantor must be living.

The following are situations where an irrevocable trust would NOT be insured on a per beneficiary basis, resulting in the trust as a whole qualifying for only $100,000 in insurance coverage.

• The trust agreement does not name the beneficiaries or provide any means of identifying the beneficiaries.  This should never happen with a trust drafted by a competent estate planning lawyer.
• The trust agreement provides that a beneficiary will receive no assets unless certain conditions are satisfied.
• The trust agreement provides that a trustee may invade the principal of the trust (for example, for the support or medical needs of a surviving spouse or other beneficiary), with the result that the assets available for the other beneficiaries may be reduced or eliminated.  This is quite often the case in typical estate planning where the grantor provides that the trustee can invade principal to provide for the health, education, maintenance and support of the surviving spouse or other family members.
• The trust agreement provides that a trustee or particular beneficiary may exercise discretion in allocating assets among the beneficiaries, with the result that the future distribution to each beneficiary is impossible to predict. This also happens quite frequently when a limited or general power of appointment is provided to the surviving spouse or a beneficiary so that the distribution of assets can be adjusted in appropriate circumstances after the death of the grantor.

IMPORTANT!

Since irrevocable trusts typically contain conditions that affect the interests of the beneficiaries or provide a trustee or a beneficiary with the authority to invade the principal, deposit insurance for an irrevocable trust account usually is limited to a total of $100,000.

Conclusion

The rules governing deposit insurance coverage for bank accounts and certificates of deposit owned by revocable and irrevocable trusts can be complex.  Given the environment for the overall economy, and the financial industry in particular, it may be important for you to know how much of your deposits are actually insured.  You can find all of the detailed rules and regulations in the Complete FDIC Guide to Calculating Deposit Insurance Coverage for Revocable and Irrevocable Trusts. (85 pages worth!). 

If you still have questions after reviewing the FDIC's explanation, please let us know.  We'd like to help you.

For more information about FDIC insurance coverage, you can obtain a copy of the Current Issue of the FDIC  Consumer News - http://www.fdic.gov/consumers/consumer/news/cnsum08/

For information about the financial condition of an individual bank, or banks in general, go to http://www.fdic.gov/bank/index.html