Calculating FDIC and NCUA Insurance

Many CD holders will have an easy time of calculating their federal (FDIC or NCUA) insurance.  The FDIC and NCUA follow similar insurance coverage guidelines for determing insured amounts.  If the holder has single-tenet account(s) (individual or business account), then $100,000 is insured at the bank.  This includes all CDs, savings accounts, checking accounts, and interest at the same bank.

 

This is also easy for IRAs (Individual Retirement Accounts).  Any account at the bank that is under the IRA title is insured up to $250,000.00.  IRA accounts are insured separately from other accounts.

 

Now the fun part.  Some CD holders have over $100,000 at each bank and credit union.  In an effort to maximize the rate or ease of handling, investors have opened large accounts at their banks or credit unions.  The good news is, under the right circumstances, these additional funds will be insured.  The bad news, as some IndyMac Bank and ANB Financial account holders have found out, is that the correct guidelines must be followed.

 

If you are a husband and wife, brother and sister, or really good friends, you can have up to $400,000 of insurance.  This is accomplished by opening single-tenet accounts for each individual of $100,000 and then a joint-tenet account under both names for $400,000.   The key to opening joint accounts is the title has both names seperated by an "and".  For instance, a husband and wife could use the title "John A. Smith and Sue B. Smith".  Having up to $400,000 of FDIC insurance is not too complicated.  Joint accounts are considered a different account type and insured separately from the above.

 

To have even more funds FDIC and/or NCUA insured, you can open up formal or informal trust accounts.  The FDIC and NCUA call them revocable trust accounts.  These are considered a different type of account and are insured separately from all of the above.  This is where it can get complicated.  A formal trust accounts is usually set up with a title such as "Smith Family Trust" or "John A. Smith Revocable Living Trust".  As a formal trust, it will have trust documents associated with it that are usually drawn up by an attorney and notorized.  Generally, these accounts are insured up to $100,000 for each qualifying beneficiary.  There are a few key things to note.

• A formal trust must be titled at the bank correctly.  Common naming conventions are to use the words "family trust", "living trust", or "revocable trust".  Multiple formal or informal trust accounts with slightly different account titles do not qualify for additional insurance.  If the owners and beneficiaries are the same, they are treated the same.
• If an owner of the trust passes away, the account has a six-month grace period where insurance coverage is maintained.
• If a beneficiary passes away, there is no grace period. For example, the trust has $300,000 with three beneficiaries. It is fully insured. If one of the beneficiaries passes away it is only insured up to $200,000. The account would need to have a new beneficiary added to maintain the $300,000.
• Qualifying beneficiaries are defined as a spouse (husband or wife as defined by the FDOMA), child (includes adopted and step-children), grandchild, parent (not in-laws), or sibling

 

Informal trust accounts are very similar to formal trusts.  They are considered the same account type.  So if you open an informal trust account that is structured the same as a formal trust, it will not have additional insurance.   The key with informal trusts is the titling.  Here there is a slight nuance between the FDIC (banks) and NCUA (credit unions).  The FDIC says the title must contain the words "payable upon death", "in trust for", "as trustee for" or the corresponding abbreviations ("pod", "itf", "atf") in addition to the bank's deposit records identifying the beneficaries.  The NCUA says the credit union's deposit account records identifying the beneficaries is enough.

 

Here are some examples.  A father opens a CD for $100,000 under his name.  He also opens a second CD for $300,000 and the CD is titled, "John Smith POD".  The second account clearly has three of his children identified as beneficiaries.  Many people list the beneficiaries on the title, but depending on the length of the names or the number of them this may not be possible.  All $400,000 would be insured.  If he had $800,000 he could open two accounts at another bank or credit union and be completely insured.  He would only have to manage four accounts at two banks instead of eight at different banks.

 

And a final example.  A husband and wife have three children and two grandchildren.  They also have saved and saved and saved some more.  As a result they have $1.2MM they want to put into a CD.  They also want to transfer both their 401Ks to IRA CDs.  Each one is $250,000.  That is a total of $1.7MM they need to invest, but they don't want to deal with sixteen different banks.  Can it all be insured?  You betcha.  First, the easy accounts.  John and Sue each deposit $100,000 into CDs under their own names.  Second, they open a joint-account for $200,000.  Next, they open up two IRA CDs, each for $250,000.  That leaves $800,000, piece of cake.  This can  be handled by a formal trust that is owned by the husband and wife.  The trust would name the children and grandchildren as equal beneficiaries.  It can also be set-up as a POD account.  In this case the CD title would be "John A. Smith and Sue B. Smith POD" and the bank's deposit records would clearly indentify the beneficiaries.  Each image in this article can be clicked for a larger view.  As this one is hard to read, I recommend that.

 

In summary, the FDIC and NCUA insure deposits based on type.  Single-tenet accounts are insured up to $100,000.  Join-tenet accounts are insured up to $100,000 for each individual in the account title.  IRA CDs are insured up to $250,000.  Finally, trust accounts are insured up to $100,000 for each beneficiary.  Each type is considered separately for insurance purposes.  Accounts at multiple banks are separately insured.

 

 As of 10/31/2008, the FDIC and NCUA insurance limits have been changed to $250,000 for a single account and $500,000 for a joint account.  The FDIC also updated the definition for POD accounts to be any person you desiginate.    The current increase in FDIC insurance is set to expire 12/31/09 unless congress makes it permanent before then.