Knowing the limits of FDIC coverage
The rules that govern federal deposit insurance are of more than passing interest to Bill Hogle, a 61-year-old Santa Monica retiree.
More than half his wealth is tied up in certificates of deposit, and he lives on the income they produce. He knows his money is in different kinds of accounts that make him eligible for more than $100,000 of insurance, and he’s been banking on that knowledge.
But, in the aftermath of the failure of Pasadena-based IndyMac Bank, we’re all increasingly nervous.
The lure of relatively high rates paid by many of the nation’s shakiest banks -- Countrywide, Fremont and IndyMac, to name a few -- has proved too tempting as overall market interest rates have fallen. Now, Hogle has nearly $200,000 in IndyMac and he’s getting differing answers about whether it’s all insured.
“I finally got through on the FDIC number, explained my situation and the guy said, ‘I think those [accounts] are probably insured,’ ” Hogle said early last week. “Probably? I said, ‘Aren’t you the FDIC? Are they or aren’t they?’ He said he would have somebody call me back on Aug. 4.”
Understanding how to set up your bank accounts is crucial for anyone who wants to deposit more than $100,000 in any one bank.
But getting answers on federal deposit insurance can prove vexing in the wake of a failure. After doggedly pursuing other FDIC officials, Hogle eventually did hear that his deposits were insured.
Want to avoid days -- maybe even weeks -- of worry? Here’s a guide to how deposit insurance rules work and tips on where to go for more information.
The basics
The Federal Deposit Insurance Corp., which has a $53-billion reserve and full backing of the U.S. Treasury, stands behind deposits of as much as $100,000 per person, per bank.
In the event of a bank failure, those who have less than that amount in the failed institution can get a check for the entire amount from the FDIC immediately.
Depositors can get significantly more insurance coverage by managing the legal ownership of their accounts, but it can be a little complex.
There are five different types of legal ownership of a bank account, and each is treated differently when it comes to deposit insurance. The big differences involve accounts owned individually, jointly, as a business, as a retirement plan or as a trust of some kind.
* Accounts set up under “individual” and “joint” ownership are added together to determine whether they exceed the FDIC’s $100,000 per person, per bank limit on deposit insurance.
Thus, if Jane Smith has a $100,000 certificate of deposit in her name alone and shares another $100,000 account with her husband, $50,000 of her assets would be uninsured.
The reason: The FDIC figures that each individual owns half of a joint account, unless they specify otherwise. In Jane’s case, her $50,000 interest in the joint account, added to her $100,000 individual account, puts her $50,000 over the limit.
The Smiths could get coverage for the full $200,000 if they took Jane’s name off the joint account and left the second account in her husband’s ownership alone. They could do the same by merging their two accounts into one joint account.
* Business accounts can win additional and separate coverage if the business is a corporation, partnership or unincorporated association “engaged in an independent activity” -- in other words, if it wasn’t just set up for insurance coverage alone.
Sole proprietorships do not get additional coverage. Assets in an account owned by a sole proprietor are added to that owner’s other accounts at the bank, much like individual and joint accounts.
* Trust accounts -- even informal trusts -- can land the owners vastly more insurance coverage. That’s because the FDIC will cover as much as $100,000 per qualifying beneficiary on these accounts. In other words, if Jane has 10 qualifying beneficiaries -- say, a spouse, three kids and six grandkids -- her trust account can be insured to $1 million.
Who qualifies as a beneficiary for FDIC coverage? The owner’s spouse, child, grandchild, parent or sibling. (There’s no DNA test. Adopted children and grandchildren count.) But in-laws, cousins, nieces, nephews and friends do not qualify.
There are two important caveats: The trust must be documented, either with a formal legal agreement or with simple paperwork at the bank that shows it’s a “payable-on-death” account, a Totten trust or an “in-trust-for” account.
And beneficiaries must be personally named. The FDIC will assume that all beneficiaries have equal interests in the account unless other arrangements are spelled out.
Also, keep in mind that even an informal trust is a legal document. If you die, those beneficiaries are legally entitled to the money that’s “in trust for” them, even if your will says something different.
* Many types of retirement accounts -- IRAs, 457 plans, self-directed 401(k)s and Keoghs -- get separate and expanded coverage of as much as $250,000 per owner. Unfortunately, teacher retirement plans, called 403(b) accounts, do not.
Adding it up
So how much can one individual have in a single bank and be fully insured? That depends on the individual, but let’s review Jane’s situation to help illustrate.
She can have $100,000 in her own account; another $100,000 in an account owned by her incorporated business; $1 million in “payable-on-death” accounts, payable to her bevy of close relatives. In addition, she can have $250,000 in her IRA. The entire $1.45 million is fully insured by the federal government.
More information
Want to estimate how much you can deposit with full coverage? Use the FDIC’s electronic deposit insurance calculator at https://www.fdic.gov/edie.
The FDIC also has a 33-page booklet called “Your Insured Deposit” on its website, which explains the rules in detail. If you’re going to keep more than $100,000 in any one institution, make sure to read it and follow the instructions to the letter.
One caveat: In a bank failure, it can take the FDIC several days to several weeks to sort through the paperwork that documents your expanded coverage. In the meantime, it may give you access to only a portion of your account -- usually just the standard $100,000.
Make sure you keep records of each account. If your bank fails, you’ll worry less and have an easier time proving your insurance coverage if you have those documents handy.
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Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit latimes.com/kristof.
