The Scope of FDIC Coverage

F. Gerald Greenwell
September 19, 2008 — 2,004 views  
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The Federal Deposit Insurance Corporation insures deposit accounts up to a standard maximum deposit insurance amount. In order to qualify for FDIC coverage, however, an account must meet three main criteria:

First, an account must be held by an FDIC-insured bank in order to be protected by the FDIC. The FDIC only insures deposit accounts at FDIC member banks. 12 U.S.C. 1811 outlines the requirements a bank must meet to become FDIC-insured. To determine whether a particular bank is FDIC-insured, however, investors can search for FDIC member banks in their area directly through the FDIC.

Second, an account must also be a deposit account in order to be protected by the FDIC. A “deposit” is defined in 12 U.S.C. § 1813. As the FDIC summarizes the definition, however, deposit accounts include (1) checking accounts, (2) demand deposit accounts, (3) negotiable order of withdrawal (NOW) accounts, (4) money market deposit accounts, (5) passbook and statement savings accounts, (6) time deposits, including certificates of deposit, (7) official items such as money orders, interest checks, travelers checks, expense checks, official checks/cashier’s checks, and loan disbursement checks.

Third, the FDIC only insures an amount up to the Standard Maximum Deposit Insurance Amount in each category per depositor at each bank. The SMDIA is currently $100,000, but the SMDIA is periodically adjusted for inflation. This maximum amount applies to the aggregate of “the amounts of all deposits in the insured depository institution which are maintained by a depositor in the same capacity and the same right for the benefit of the depositor either in the name of the depositor or in the name of any other person, other than a [trust fund meeting certain qualifications, discussed below]. Although the FDIC only insures up to $100,000 per depositor per bank, investors can arrange to maximize FDIC coverage through joint accounts, trust accounts, and through opening accounts at additional banks.

A depositor’s single-ownership accounts, joined together, will be insured for up to $100,000 per bank. Accounts held by fiduciaries such as nominees or guardians on behalf of one beneficiary are treated as single-ownership accounts of the beneficiary, and therefore such accounts are not insured separately from the beneficiary’s other single-owner accounts.

Up to $100,000 of a depositor’s share of a joint account will also be insured by the FDIC. Joint ownership accounts are insured separately from single-ownership accounts. Consequently, a depositor can have a single-ownership account in his own name insured for up to $100,000, and at the same time can have a joint account insured for up to $100,000 per account owner (i.e., the FDIC would insure $200,000 of an account owned by a husband and wife, but it would additionally insure $100,000 of an account in each spouse’s name).

The FDIC also insures revocable trust accounts separately from accounts owned by the trust settlor or the trust beneficiaries. Examples of this type of account are P.O.D. accounts, “Totten trusts,” and other accounts in which the settlor keeps the right to access the balance, but which will go to named beneficiaries automatically on the settlor’s death. Revocable trust accounts are insured for up to the SMDIA per each beneficiary. These accounts are only insured separately, however, if the trust instrument or the account description clearly indicates that the account is held in trust (using language such as “in trust for,” etc.), the account passes upon the settlor’s death, and if the trust passes to qualifying beneficiaries.[1] If these criteria are not met, then the account will be counted as a single-ownership account owned by the settlor, and therefore it will count towards the settlor’s original SMDIA.

Irrevocable trust accounts, whether established by one or more trust instruments, are insured for up to the SMDIA per beneficiary per settlor. Revocable trust interests are insured separately from irrevocable trust interests, so the FDIC will insure up to the SMDIA per settlor per beneficiary for irrevocable trust interests in addition to an amount up to the SMDIA per qualifying revocable trust interest. If trust interests are contingent, requiring any determination of whether conditions have been met, then those trust interests will be insured up to the SMDIA in the aggregate, not per beneficiary.

Employee benefit and retirement plans are insured for up to $250,000 per depositor per bank. These plans, however, are subject to a detailed set of requirements to qualify for FDIC insurance.

Deposit accounts owned by corporations, partnerships, or unincorporated associations which engage in independent activity are insured for up to the SMDIA per corporate entity per bank.

Options for Amounts Not Insured

Certain investments which might be held by banks are not “deposit accounts” for the purposes of FDIC insurance. For example, the FDIC does not insure investments in mutual funds, U.S. Treasury Securities, annuities, stocks, bonds, insurance products (such as automobile and life insurance), or safe deposit boxes. All of these investments are those in which banks never hold title to the investments, but only possession, so the bank’s creditors cannot claim those investments.

Even if an investment is not a deposit account insured by the FDIC, however, it may be insured otherwise. The Securities Investor Protection Corporation protects securities investments up to a set limit. The SIPC, in the event of an SIPC-member firm failure, steps in to return securities to their owners, and it insures customers’ securities for up to $500,000.

The Certificate of Deposit Account Registry Service is another alternative for maximizing FDIC coverage of large amounts. Under CDARS, member organizations insure up to $50 Million by purchasing CDs of less than $100,000 which are all issued by different FDIC-insured banks within the CDARS network. This effectively creates deposit accounts for up to the SMDIA with as many separate FDIC-insured banks as an investor needs to make sure that all of his investment is FDIC-insured. While CDARS achieves FDIC coverage for larger amounts by using this multiple-bank approach, the investor can access the full amount of his investment through the participating home bank. Kentucky has several CDARS member banks, which can be found directly through the CDARS network.

[1] See 12 C.F.R. § 330.10. (“Qualifying beneficiary” is defined as “the owner's spouse, child/children, grandchild/grandchildren, parent/parents, brother/brothers or sister/sisters.” Unrelated persons and other relatives do not qualify.)

F. Gerald Greenwell

Frost Brown Todd