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FDIC Insurance: Understanding the Different Account Categories
How deposits are separately protected up to at least $250,000 at each bank
You probably know that the basic FDIC insurance coverage is $250,000 for each depositor at each insured institution. But did you know there are many different ways depositors can be insured for that amount?
"The FDIC deposit insurance rules provide for what are commonly called separate 'ownership categories.' What this means is if the depositor meets the requirements of an ownership category, he or she is insured up to at least $250,000 in those categories," said Martin Becker, Chief of the FDIC's Deposit Insurance Section.
Here we will look at the six most common FDIC insurance categories that apply to individuals and how depositors could be fully insured at any one bank if their bank were to fail. Note that the examples below are solely to demonstrate ways you can be insured by the FDIC; they are not intended as a specific guide for your estate planning.
Single Accounts: The most common way an individual is covered by FDIC deposit insurance is to simply open an account in his or her own name. If the deposit does not list any beneficiaries, the depositor's funds are insured for up to $250,000 under FDIC's single ownership category. So, if John and his wife Mary each have single-ownership deposits at the same bank, their individual accounts there are separately insured for up to $250,000.
As for John and Mary's children, minors typically cannot have bank accounts unless a custodian has established bank deposits for them. A common way to transfer funds to a minor is to set up an account under the Uniform Transfers to Minors Act or "UTMA," as adopted by the state in which the deposit will be established. Under UTMA, the minor child is considered the legal owner of the funds. Therefore, for the purpose of FDIC deposit insurance coverage, each child is insured for up to $250,000 in total per FDIC-insured bank.
While any amount can be given to a minor child, federal gift tax laws must be complied with to avoid taxes. The maximum gift amount in 2013 that is excluded from federal taxes, for gifts from one individual to another, is $14,000 per year. "Based on current tax law, parents can each give, free of federal taxes, a total of $14,000 to each of their children — $28,000 per child per year," noted Calvin Troup, an FDIC Senior Consumer Affairs Specialist.
Joint Accounts: Two or more people who are co-owners of funds can have FDIC deposit insurance coverage under the joint ownership category. To qualify, each owner must have equal withdrawal rights to the funds and there cannot be beneficiaries named on the account. Under the FDIC's rules, each co-owner is separately insured for up to $250,000 for his or her ownership share in all qualifying joint ownership deposits he or she has in any one bank.
Typically, joint ownership deposits are held as "joint tenants with right of survivorship," which means that when one owner dies, the ownership of his or her share of the funds typically passes to the remaining co-owner or co-owners on the account. As an example, Kathy and her daughter Ellen would be fully insured for up to $500,000 in a joint account, in addition to any single ownership or other accounts they might have at the same bank.
Certain Retirement Accounts: What about retirement funds such as Individual Retirement Accounts (IRAs)? Under the "Certain Retirement Accounts" deposit insurance category, an individual's self-directed retirement funds are insured for up to $250,000 per owner. Self-directed means the consumer chooses how and where the money is deposited. Let's say that David and Barbara each have IRA deposits in an FDIC-insured bank. Those deposits would be separately insured for up to $250,000.
Remember that depositors would need to establish their own IRA account(s) at the bank since IRAs cannot be co-owned. Assuming that David and Barbara qualify to contribute to their own IRAs, their basic contribution (under current law) would be $5,000 each per year. If you have any questions about your tax situation, you should discuss them first with your financial advisor before opening a retirement account.
Employee Benefit Plan Accounts: If you participate in a retirement plan that is not self-directed -- such as a pension plan or a defined benefit plan -- the FDIC will insure your ownership interest in any deposits placed by your employer's third-party administrator up to $250,000, provided that certain requirements are met. The FDIC often refers to this as "pass-through coverage" because the insurance passes through to the employee, who is considered the owner of the funds. These deposits also are insured separately from any accounts that the employer or you may have in the same FDIC-insured institution.
Revocable Trust Accounts: A revocable trust deposit is an account used for testamentary purposes — that is, the account specifically names one or more beneficiaries who would receive funds when the trust deposit owner(s) is deceased. The FDIC recognizes two types — "informal" and "formal."
An informal revocable trust is a simple way to leave funds to your beneficiaries through a contract set up in the bank. The testamentary intent of the account transfer is typically conveyed by terms such as "payable-on-death" (POD) or "in-trust-for." For more complicated estate planning and greater flexibility in distributing assets, a depositor may use a formal revocable trust, which is typically a written document drafted by an attorney.
Deposits can be established in an FDIC-insured bank using either an informal or formal trust with up to $250,000 insured for each of the beneficiaries named. If Bill and Teresa use the formal revocable trust method since they have three minor children to whom they wish to leave all of their assets equally among the children, the "Bill and Teresa Revocable Trust" would be insured up to $1.5 million (two owners times three beneficiaries times $250,000).
Irrevocable Trust Accounts: These are deposit accounts held in connection with a trust for which the owner typically gives up ownership of the assets and the right to modify the agreement. Irrevocable trust accounts commonly are established based on either state law, a written trust agreement or, quite often, due to the death of an owner of a revocable trust. In general, an irrevocable trust deposit account is insured up to $250,000, and perhaps more if the interests of the beneficiaries are unconditional. This insurance will be separate from the coverage for other types of deposit accounts the owner or the beneficiaries have in the bank.
Let's say that Frank creates an irrevocable trust for a child and places close to $250,000 in it. The funds would be fully insured up to $250,000 under the irrevocable trust category, separately from any other deposits Frank has in other types of accounts at that same bank.
The bottom line: Our examples show the benefit of discussing with your banker the deposit insurance coverage for the various account categories. Do you want to learn more about how you can protect all of your deposits with FDIC insurance? To speak with a deposit insurance specialist, call the FDIC toll-free at 1-877-ASK-FDIC (that's 1-877-275-3342). Additional FDIC resources are listed in For More Help or Information on FDIC Insurance.
Last Updated 3/12/2013