Is Your Money Safe?

Benefiting from New Rules for Revocable Trusts and The Temporary Increase of FDIC Insurance to $250,000

Many people are concerned about the safety of the funds deposited with banks and other financial institutions. Several large banks and brokerage houses have failed. There are stories and worries about getting funds out of your accounts and mutual funds when you need them.  

Because of the run on banks during the Great Depression, the federal government established the Federal Deposit Insurance Corporation (FDIC) to provide insurance to depositors in FDIC insured accounts. If your bank goes bankrupt and the bankrupt bank does not have the funds to pay you back for what you had on deposit with the closed bank, then the FDIC will reimburse you for what you had in the bank-but only up to the insurance limits.

If you had $120,000 in an account in a failed bank and the applicable FDIC limit is $100,000 for your account, then the FDIC would only pay you $100,000.  For this reason, people may spread out their money over $100,000 into several different banks. Of course, if the bank was sold to another bank, then the new bank usually takes over the responsibilities of the failed bank and the FDIC insurance may not be used directly.

FDIC insurance applies to checking and savings accounts, CDs, and money market deposit funds in your bank if your bank participates in FDIC. It does not include money market mutual funds, other mutual funds, stocks or bonds held by your bank.  Many financial advisors are recommending that you move your holdings out of money market mutual funds; you should consult your financial advisor. If you do not have a financial advisor, we can recommend one or you can call your bank to determine whether the funds are in a money market mutual fund and whether you should move these funds to a money market money fund.

Money in brokerage accounts is insured by a private insurance company where the limits are greater than the old $100,000 limit. Check with your financial advisor about this insurance.

Section 136 of the Emergency Economic Stabilization Act recently passed by Congress increases the limits for FDIC insurance temporarily from $100,000 to $250,000 effective October 3, 2008 through December 31, 2009. For Federal Credit Unions, there was the same increase to $250,000 from October 3, 2008 through December 31, 2009.

Benefits of A Revocable Trust

You could increase the old $100,000 FDIC insurance limit by the use of a revocable trust.  But, the revocable trust rules were confusing to consumers and the banks. As result, the FDIC has recently issued new interim rules effective September 26, 2008 that make it much easier to use revocable trusts to increase your FDIC insurance at your bank.  So, we have new rules from the FDIC and new rules from Congress. How do they fit together?

To take advantage of the new interim rules for revocable trusts, take the following steps:

1.   Set up a revocable trust, either joint or separate.

2.  You transfer your checking or savings account at your bank to your revocable trust or trusts.

3.  The title to your bank account must include the name of your trust.

4. For a payable on death account or other informal arrangement, each beneficiary must be listed on the account.  For your revocable trust, you do not have to list the names of your beneficiaries on the accounts with the bank.

5.  Under the interim FDIC rules, you have FDIC insurance for each beneficiary of your trust up to $500,000, but not in excess $500,000, except where you have more than five beneficiaries receiving more than $500,000.  I have asked the FDIC if the increase from $100,000 to $250,000 by legislation temporarily increases the test level from $500,000 to $1,250,000 under the interim rules.  I’ll brief you on this on our invitation only meeting on the FDIC rules.

6.  You do not get additional $100,000 exemptions by separate accounts in the same bank. Accounts for each person in the same bank are aggregated into one account for determining the total FDIC insurance for you at that bank.

By use of a revocable trust, you can increase your FDIC insurance at the same bank.

Example #1. John and Jane Smith each have their own revocable trust which provides for the surviving spouse and then for their three children. They have a bank account at their bank in their own names, not in the name of their trust, and name each other as the survivor. The have $600,000 in their accounts at this Bank. Under the $100,000 limit, they are only insured up to $200,000. Under the temporary $250,000 legislation, they are insured up to $500,000 and $100,000 Is not insured.

Example #2.  John and Jane Smith.  Same facts except that they have two separate accounts at their bank in the name of their revocable trusts. While both are alive, the beneficiaries for FDIC purposes are John, Jane and the three children, allowing for FDIC insurance on John’s trust account up to $500,000. For Jane, it is at least $300,000 and the interim rule appears to say another $500,000 for a total protection of $1,000,000. I am seeking further clarification.

Example #3.  John and Jane Smith. Same facts as example #1, but the new $250,000 per beneficiary applies. The John and Jane Living Trusts would be insured a combined total of $2,000,000 to $2,500,000.

Example #4.  John and Jane Smith. John passes away. If the limit is $250,000, then the John trust no longer qualifies as a separate account and the amount drops to $1,250,000 six months after the death of John.

The new rules are much more flexible as to who qualifies as a beneficiary.   No longer do you have to be concerned about contingent beneficiaries or non relatives or how much you leave each person. To increase your protection for your money up to the $500,000 limit applicable under the old $100,000 insured amount, it does not matter that you leave only $20,000 to the additional beneficiaries.  But, the coverage only protects the amount of money in the account.  A friend or a charity qualifies as a beneficiary. There is no requirement that a beneficiary must be a spouse. Unmarried adults who live together can qualify as beneficiaries under the new rules. But, pets do not qualify as a named beneficiary-sorry pet lovers.

Example #5.   Alice is widowed and has one daughter. Alice has named her daughter on her account as a co signer so that her daughter could take care of Alice in the event of the disability of Alice. Alice has $400,000 in this account. Because the FDIC considers this as jointly owned, there is $200,000 of insurance under the $100,000 limit and $500,000 under the $250,000 limit.  If Alice had more than $500,000 in her accounts at this Bank, and the limit is $250,000, Alice could increase her insurance up to $1,000,000 by holding the account in a revocable trust which names her daughter and two charities for $10,000 each.  

Example #6. Frank is not married and has no children. Frank has an account at the Bank with $600,000, does not have a living trust and does not use a paid on death account. Under the $100,000 limit, Frank is only insured up to $100,000. Under the temporary limit of $250,000, Frank is insured only up to $250,000.

Example #7. Frank again has $600,000 in the bank and no spouse or children.  Frank has created a living trust and transfers his accounts at the Bank into the name of his living trust. Frank’s trust names a friend, three nieces and nephews, a qualified charity and his dog Fido as beneficiaries of his trust. The qualified beneficiaries are Frank, the friend, the three nieces and nephews and the charity (sorry Fido) for a total of six beneficiaries. Under the $100,000 limit, the total insured amount for Frank is at least $500,000 and could be as high as $600,000. Using the temporary $250,000 limit, it could be as high as $1,250,000.

Example #8. Frank again, same facts as #7, but Frank’s trust leaves $50,000 to his friend, $40,000 each to each niece and nephew and $240,000 to the charity.  Frank has $600,000 in his accounts at one bank.  Applying the $100,000 insurance level, Frank’s friend’s interest is insured up to $50,000, each niece and nephew up to $40,000 and the charity up to the $100,000 limit. Frank has at least $100,000 and this totals to $370,000.  The FDIC rule test is the $100,000 times the number of beneficiaries, or $500,000, which ever is greater, but not more than $500,000 except where more than a total of $500,000 is left to all of the beneficiaries. Therefore, Frank’s account is insured up to $500,000 and $100,000 is not insured.  If the $250,000 Congressional limit applies, the account could be insured up to $1,250,000 and the $600,000 is fully insured at $600,000.  Either way, Frank gets more protection using a living trust.

Example #9. Frank again, except that Frank leaves $100,000 to each of the three nieces and nephews. The total amount left to everyone totals $650,000.  Under the $100,000 limit, all of the $600,000 is insured.  With the $250,000 limit, the insured amount could be as high as $1,250,000.

Another way to get additional coverage is where your bank participates in the Certificate of Deposit Account Registry Service (CDARS). Through this system, your bank can send the funds to be held in CDs in other banks and receive $100,000 coverage for each account in each separate bank under the $100,000 limit. With the new Congressional $250,000 temporary amount, this will be less necessary than in the past.

Basically, you get at least $250,000 per account until December 31, 2009 if you do nothing. If you want more protection, and the new $250,000 applies to living trusts, you can use a living trust to increase your protection up to $1,250,000, or in some cases, a higher amount.