Background
The Federal Deposit Insurance Corporation (FDIC) has provided deposit insurance coverage to depositors of insured banks since 1933. This protection is important to all investors, especially given the current rocky economy. However, it may be imperative for older clients who tend to be invested heavily in cash and who are often dependent on these accounts to cover living expenses. They need the peace of mind the coverage provides.

Note: The covered institutions must display an official sign at each teller window or teller station. All FDIC institutions should have a brochure available to answer other questions regarding coverage. Additional information can be obtained by calling (877) 275-3342 or via the Internet at www.fdic.gov.

Types of Deposits Protected
All types of deposits received by a financial institution in its usual course of business are insured. For example, savings deposits, checking deposits, deposits in NOW accounts, Christmas Club accounts, Certificates of Deposit (CDs), cashier's checks, money orders, officers' checks, and outstanding drafts are all covered. Certified checks, letters of credit, and traveler's checks, for which an insured depository institution is primarily liable, are also insured when issued in exchange for money or its equivalent, or for a charge against a deposit account.

Any person (US citizen or not) or entity can have FDIC insurance coverage in an insured bank. However, only deposits that are payable in the U.S. are covered. Deposits only payable overseas are not insured.

Securities, mutual funds, and similar types of investments, even if purchased through a bank, are not covered. Similarly, treasury securities purchased by an insured institution on the customer's behalf are not insured, but these investments are backed by the full faith and credit of the U.S. government.
Creditors (other than depositors) and shareholders of a failed bank or savings association are not protected by federal deposit insurance, nor are safe deposit boxes or their contents.

Amount of Coverage Available
FDIC insurance covers depositors' accounts at each insured bank, dollar-for-dollar, including principal and any accrued interest through the date of the insured bank's closing, up to the Standard Maximum Deposit Insurance Amount (SMDIA). The SMDIA is normally $100,000 ($250,000 for retirement accounts) per depositor, per insured bank. However, the Emergency Economic Stabilization Act of 2008 increased this amount to $250,000 for all types of accounts for the period 10/3/08-12/31/09. This increased amount was extended through 12/31/13 by the Helping Families Save Their Homes Act of 2009.

Note: To keep things simple, this article will refer the SMDIA as $250,000. Keep in mind that after 2013, absent Congressional action, the SMDIA for all accounts except retirement accounts will fall to $100,000.

The FDIC insures deposits that a person holds in one insured bank separately from any deposits that the person owns in another separately chartered insured bank. For instance, if a person has a checking account at Bank A and has a checking account at Bank B, both accounts would be insured separately up to the SMDIA. Funds deposited in separate branches of the same insured bank are not separately insured.

Coverage Is Based on the Account's Ownership Category
FDIC insurance coverage is not determined on a per-account basis, but on an ownership basis. Thus, the type of account has no bearing on the amount of insurance coverage, and the social security numbers or tax identification numbers do not determine coverage. Instead, separate insurance coverage is provided for funds held in different ownership categories. This means that a bank customer who has multiple deposits may qualify for more than $250,000 in insurance coverage if the customer's accounts are deposited in different ownership categories and the requirements for each ownership category are met. Thus, supercharging a client's available FDIC coverage may be as simple as retitling accounts so they fall into different ownership categories.

The following paragraphs discuss how various ownership categories impact FDIC insurance coverage.

Single Ownership Accounts. A single (or individual) account is one owned by one person. Such accounts include those in the owner's name, those established for the benefit of the owner by agents, nominees, guardians, custodians, or conservators, and those established by a business that is a sole proprietorship. All single ownership accounts established by, or for the benefit of, the same individual at the same bank are added together. The total is insured up to a maximum of $250,000, including principal and interest.

Example 1: The combined total of all single ownership accounts are insured up to $250,000.
Marci Jones has four single accounts with a total balance of $400,000 at the same insured bank, including one account (with a balance of $175,000) in the name of her business, which is a sole proprietorship. The FDIC combines all four of Marci's accounts (including her sole proprietorship account) to determine the SMDIA. Thus, Marci's single accounts totaling $400,000 are insured for $250,000, leaving $150,000 uninsured. Keep reading though. There are a number of ways Marci can restructure her accounts to boost her FDIC coverage to $400,000.

If an individual owns and deposits funds in his or her own name, but then gives another person the right to withdraw funds from the account, the account will be insured as a joint ownership account, which as we'll discuss next, is eligible for its own SMDIA. However, the withdrawal right doesn't change the account to a joint account if the withdrawal is allowed pursuant to a Power of Attorney or the deposit account records clearly indicate, to the FDIC's satisfaction, that the funds are owned by one person and that the other signatory is authorized to withdraw funds only on the owner's behalf.

Similarly, accounts for which the owner has designated a beneficiary who will receive the deposit at the owner's death are treated as revocable trust accounts (see later discussion), not as a single owner account. Revocable trust accounts are also eligible for their own SMDIA.

Joint Ownership Accounts. A joint account is one owned by two or more persons. (Once again, if there's a designated beneficiary, it's a revocable trust account, not a joint account.) Joint accounts are insured separately from single accounts if all co-owners: (1) are natural persons, (2) have a right of withdrawal on the same basis as each of the other co-owners, and (3) have signed a 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 shares of every joint account that he or she owns at the same insured bank are added together with his or her other joint account shares at the same bank, and the total is insured up to $250,000. All co-owners' shares are considered equal unless the deposit account records state otherwise.

Business Accounts. Corporate, partnership, and unincorporated association accounts are considered owned by the entity and are insured separately from personal accounts of shareholders, partners, or members. (As discussed earlier, a sole proprietorship account is considered a single account of the sole proprietor.)

Revocable Trust Accounts. A revocable trust account is any account (single or joint) on which the owner has designated a beneficiary who will receive the deposit at the owner's death. This ownership category includes informal trusts created when the account owner signs an agreement (usually part of the bank's signature card) directing the bank to transfer the account to the named beneficiaries upon the owner's death. It also includes formal written revocable trusts created for estate planning purposes (often referred to as living or grantor trusts).

In general, the owner of a revocable trust account is insured up to $250,000 per beneficiary if: (1) the account's title indicates that it is held pursuant to a trust relationship or is payable upon the owner's death (POD), (2) the beneficiaries are named in either the deposit account records or the trust agreement, and (3) the beneficiaries include only living persons, charities or a nonprofit organizations. If these requirements aren't met, the account is considered a single ownership account (or joint owner account if there is more than one owner).

This SMDIA generally applies to the combined interests for all beneficiaries the owner has named in all formal and informal revocable trust accounts at the same bank. Therefore, the maximum coverage for the trust owner is determined by multiplying $250,000 times the number of different beneficiaries, regardless of the dollar amount or percentage allotted to each different beneficiary. However, when a revocable trust owner designates six or more beneficiaries and the beneficiaries do not have equal beneficial interests (i.e., they receive different amounts), the owner's revocable trust deposits are insured for the greater of: (1) the sum of each beneficiary's actual interest in the revocable trust deposits up to $250,000 for each different beneficiary, or (2) $1.25 million.

Retirement Accounts. The FDIC adds together all retirement accounts owned by the same person at the same insured bank and insures the total amount up to $250,000. Covered retirement accounts include traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Also included are 457 Plan accounts for state government employees, self-directed Keogh accounts, and employer-sponsored defined contribution plan accounts that are self-directed [e.g., 401(k) accounts].

Note: Unlike revocable trust accounts, for retirement accounts, FDIC coverage is not impacted by the existence of beneficiaries. Also, in 2006, Congress permanently increased the SMDIA for retirement accounts to $250,000 per depositor, per insured bank. Therefore, the SMDIA for retirement accounts will remain at $250,000, even after 2013 when the SMDIA for other types of deposits is scheduled to go down to $100,000.

Using Ownership Categories to Maximize an Individual's SMDIA at One Bank
Example 2 illustrates how various ownership categories can be used to maximize the available SMDIA at a single bank.

Example 2: Maximizing a family's SMDIA at a single bank.
Scott and Joan West have two school age children, Joe and Sam. They want to maximize the FDIC insurance coverage of their current deposits at First State Bank. As a family of four, the West's can qualify for up to $3 million in FDIC coverage by structuring the ownership of their deposits as follows:

Increasing Available FDIC Coverage within an Ownership Category
Clearly, by carefully structuring account ownership, many clients can easily cover all their bank deposits at any one bank. However, this will not always be possible. In this case, they can always take deposits to another bank. However, if they really want to keep the deposits under one roof, they can increase their FDIC-covered accounts at a single bank by using the Certificate of Deposit Account Registry Service® (CDARS). Using CDARS, deposits exceeding $250,000 are placed by a participating bank into smaller- denomination certificates of deposit at multiple FDIC-insured financial institutions.

Note: The CDARS program is not affiliated with the FDIC or the American Bankers Association (ABA); however, it has been endorsed by the ABA. Information about the CDARS program is available at www.cdars.com.

Conclusion
Given today's economy, it only makes sense to structure bank accounts to take full advantage of available FDIC insurance coverage. It should be relatively easy to do, and your clients will appreciate your looking out for them. That's what we call a win-win situation.