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Little-Known Tricks for Maximizing Your FDIC Insurance

By: Shannon McNulty, Attorney, The Village Law Firm

By: Shannon McNulty, Attorney, The Village Law Firm

Shannon's work is sophisticated and reflects her deep knowledge of the laws governing estates, taxation and child guardianship issues. Shannon approaches each client with sensitivity and compassion, understanding that many of the decisions that they will have to make can be difficult.

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With the recent banking crisis, FDIC insurance has become a hot cocktail party topic – or at least something you want to bring up with your financial advisor.   
 
While the most basic FDIC rules are widely known, learning these lesser-known tricks that can make you the life of the party – and even protect your money. 
 
Note that the information below only applies to accounts within the United States. Banks in other countries may have their own legal protections. 
 
Basics of FDIC Coverage 
 
First, the basics:  the Federal Deposit Insurance Corporation (FDIC) provides protection for up to $250,000 per depositor, per insured bank for the following types of accounts: 
 
·       Checking accounts 
·       Savings accounts 
·       Money market deposit accounts 
·       Certificates of deposit 
 
If a depositor has multiple accounts at the same bank, the $250,000 insurance limit applies to the combined amount.  For example, if you have a savings account and a checking account with a balance of $150,000 each at Bank XYZ, only $250,000 of the $300,000 is insured. 
 
In order to maximize the protection provided by the FDIC, it can be a good idea for a depositor to spread your cash among different institutions to keep the total in any one bank below the $250,000 limit.  However, there can be other ways to multiply your coverage without opening accounts at multiple banks. 
 
Most retail banks are covered by FDIC insurance, but if you want to check to make sure that your bank is covered, you can look it up on the FDIC website
 
Definition of a “Depositor” 
 
Because FDIC coverage is based on an amount allotted to each “depositor,” it is important to understand what constitutes a single depositor.  In the most common scenario, a depositor is a single person who deposits money in a financial institution.  However, there are more detailed rules governing who or what counts as a single depositor entitled to their own $250,000 protection.   
 
Joint Accounts.  For joint accounts, each account owner is considered a separate depositor.  So a joint account held $500,000, the entire amount would be insured if neither owner held any other accounts at the bank. 
 
Business Accounts.  Businesses operated as a separate entity under state law, such as a corporation, partnership, or an LLC, are counted as a separate depositor.  If you have a personal checking account with $250,000 and a separate business account with $250,000, both accounts will be fully insured for a total of $500,000.  If the business account is held as a sole proprietorship without a separate business entity, the account will be treated as a personal account of the owner, so in the example above, only $250,000 would be covered. 
 
Retirement Accounts.  Tax-deferred retirement accounts, such as IRAs and 401(k) accounts receive separate coverage of up to $250,000 per owner.  If a person has an IRA and a 401(k) account at one bank, and a personal checking account at the same bank, the IRA and 401(k) accounts combined receive up to $250,000 in protection, and the personal checking account would receive an additional $250,000 in protection. 
 
Estate Accounts.  The estate of a decedent is treated as a single depositor for purposes of accounts in the estate’s name.  
 
Irrevocable Trusts.  Irrevocable trusts are treated as a single depositor separate from the trust’s grantor or beneficiaries if the grantor does not retain any rights in the trust property.  Such trusts are entitled to $250,000 of coverage.  If the grantor retains rights in the trust, the trust account is treated as owned by the grantor for purposes of calculating the coverage. 
 
Multiplying Coverage with Revocable Trusts 
 
Holding your account in the name of a revocable trust is a little-known hack for leveraging coverage provided by the FDIC.  A revocable trust is insured up to $250,000 per “unique beneficiary” for a maximum total of $1.25 million, per financial institution, provided specific requirements are met.  The maximum deposit insurance coverage for each trust owner is determined by multiplying $250,000 times the number of unique beneficiaries, regardless of the amount allocated to each unique beneficiary in the trust. Therefore, a revocable trust with one owner and five unique beneficiaries is insured for up to $1,250,000.  Note that until March 31, 2024, a trust account is eligible for up to $1.5 million in coverage if it has six or more beneficiaries. 
  
To qualify for this special coverage, the account must be titled in the name of the trust, and the beneficiaries of the trust must be living persons, charities, or non-profit organizations.  The extended coverage does not apply to a beneficiary that is another trust.  For this reason, many revocable trusts that are set up to protect assets for a beneficiary upon the grantor’s death may not qualify.   
 
This special rule for revocable trusts also applies to “Totten Trusts,” or accounts that name a distribute upon the death of the account holder through a “payable on death” (POD) or “transfer on death” (TOD) designation. 
 
Leveraging FDIC insurance using revocable trusts can be a powerful tool for protecting funds beyond the usual $250,000 limit without opening accounts at multiple financial institutions. It is important to note that the FDIC insurance limit is subject to change, so individuals should stay up to date on the current limit to ensure that their assets are fully protected. 

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