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Sarah Delano Pavlik and Tom Pavlik write a monthly column on legal and business issues for the Springfield Business Journal.


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In light of the current economic crisis, you may be looking more closely at the FDIC program to determine if your money is insured. Although most people are aware of the $100,000 limit for deposits, there are many details of the program you might not know.

The Federal Deposit Insurance Corporation, or FDIC, is an independent agency of the United States government. The FDIC insures deposits if an FDIC-insured bank or savings association fails. (For simplicity, I will refer to any insured institution as a bank.) FDIC insurance is backed by the full faith and credit of the United States government. Because most banks and savings and loans are insured by the FDIC, it is easy to assume that they all are, but that is not true. Banks must enroll in the FDIC program. They are not automatically included in it. You can determine if your bank is insured by using the FDIC's Bank Find service or by calling the FDIC at 1-877-275-3342.

FDIC insurance applies only to cash, not to stocks, bonds or other investments. However, it does apply to all types of accounts, such as checking, NOW and savings accounts, money market deposit accounts, and certificates of deposit.

Insurance coverage is limited to $100,000 per person per insured bank. This raises the question of how many people can be insured on one account. If there is only one name on the account, the answer is simple. All deposits held in that name at one bank are added together, and the insurance limit is $100,000. For example, if you have a checking account with $20,000 and a certificate of deposit of $90,000 at the same bank, $10,000 of your deposits is not insured.

If there are multiple owners of an account and each owner is entitled to an equal share of the account, then each owner is insured up to $100,000. For example, if husband and wife own a $200,000 certificate of deposit jointly (and no other accounts at the same bank), then their deposit is fully insured.

Additional coverage is given for pay-on-death or trust accounts. If the account qualifies, then the insured amount is $100,000 per beneficiary, per owner. For example, if mom has a $200,000 certificate of deposit which is pay-on-death to her two children, then the CD is fully insured. Coverage of $100,000 is given to each beneficiary (child) for the one owner (mom). If mom and dad own the CD jointly, then up to $400,000 can be insured – $100,000 of coverage for each child for mom, and $100,000 of coverage for each child for dad. Mom and dad do not receive any coverage as the owners of the account. Rather, coverage is calculated based on the number of beneficiaries.

Only certain beneficiaries qualify for this additional coverage. The beneficiary must be the owner's spouse, child, grandchild, parent, or sibling. Stepchildren also qualify. In-laws, grandparents, great-grandchildren, cousins, nieces and nephews, friends, organizations (including charities), and trusts do not qualify.

The same concept is applicable for living trust accounts, although determining the beneficiaries is more complicated and beyond the discussion here. Keep in mind that pay-on-death accounts and living trust accounts at the same bank are combined for purposes of the insurance limits. For example, multiple pay-on-death accounts are combined, and they are also combined with living trust accounts.

There is a larger insurance limit of $250,000 for certain retirement accounts. Only the following types of retirement plans are included: Individual Retirement Accounts (IRAs) including traditional IRAs, Roth IRAs, Simplified Employee Pension (SEP) IRAs, and Savings Incentive Match Plans for Employees (SIMPLE) IRAs; Section 457 deferred compensation plan accounts; Self-directed defined contribution plan accounts; and Self-directed Keogh plan (or H.R. 10 plan) accounts. All deposits that an individual has in any of the types of retirement plans listed above at the same insured bank are added together and the total is insured up to $250,000. Naming beneficiaries on a retirement account does not increase deposit insurance coverage.

Money market accounts at FDIC insured banks are insured. Money market accounts at brokerage firms have not been insured, however, this is changing. The U.S. Treasury Department announced a temporary guaranty program for money market funds on September 19, 2008. For the next year, the U.S. Treasury will insure the holdings of any publicly offered eligible money market mutual fund – both retail and institutional – that pays a fee to participate in the program. Details of the program will be forthcoming from the Treasury Department.

The FDIC insurance limitations have caused people to open accounts at many different banks to keep their balance at any one bank under $100,000, which can be an inconvenience. In response to this situation, a new program was created in the last few years to allow insurance coverage of up to $50 million at one bank. The program is the Certificate of Deposit Account Registry Service or CDARS, pronounced "cedars."

Banks participating in CDARS are members of a special network. They place your funds into certificates of deposit issued by other banks in the network. These deposits are placed in increments of less than $100,000 - so that both your principal and interest are eligible for FDIC insurance. They exchange deposits with other banks that are members of the network. These exchanges, which occur on a dollar-for-dollar basis, bring the full amount of the original deposit back to your bank. Your banker can explain the program to you in more detail.

If you have questions about your funds, you can confirm that your deposits are within the insurance limits by using the FDIC's Electronic Deposit Insurance Estimator and other online resources at www.fdic.gov/deposit/deposits or by calling the FDIC at 1-877-275-3342.
Posted in: October, 2008
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