Estate Planning

The old line among parents of teens - It's 9 p.m.; do you know where your children are? - has a replacement these days. In the wake of the recent failure of a few banks (including a high-profile closure in Southern California), the pressing question may soon be: It's 2008; do you know where your bank accounts are and whether they're fully FDIC insured?

Of course, for the unwitting consumers who found out this summer that some of their bank-held funds exceeded Federal Deposit Insurance Corp.'s limits, or didn't meet requirements for full coverage, the failures are no joking matter. And several frustrated readers have indicated in recent weeks their questions have been either "inadequately addressed or not answered at all" by bank personnel.

This mayhem has spawned a fair amount of confusion about precisely what the coverage limits are. In fact, consumers have either less or more to worry about than they think, depending on how their accounts are owned.

Why? FDIC insurance isn't merely a matter of how much cash is stashed in that checking or savings or money market account. If it's $100,000 or less, there's a pretty good chance that the account holder will be OK if a bank failure occurs. But not necessarily, if there are multiple accounts or certain account-ownership arrangements.

Here's the basic scoop:

The coverage of deposits up to $100,000 is predicated on who owns the account and how many accounts a person has in one institution.

Deposits in a single account set up in the traditional fashion, as an individual account, are covered up to $100,000, provided that's the individual's only account at that institution. For instance, if Tom has $81,000 in a savings account and $6,000 in his checking account, if the bank goes under, he's covered.

But what if Tom has two accounts in the same bank - the single savings account plus a $120,000 certificate of deposit on which his wife, Sandy, is a joint account owner? In that situation, because Tom owns half of the CD, $60,000, that amount combined with his $87,000, means that up to $47,000 might not be covered because that sum exceeds the $100,000 per-person/per-institution limit. However, had he and Sandy legally jointly owned the savings and checking account, a total of $200,000 would be covered, leaving $7,000 uninsured.

That's a relatively uncomplicated scenario. When businesses own several bank accounts, or a trust account with a balance much larger than $100,000 is housed in a single institution, the situation changes.

Regarding business accounts, owners cannot split a $300,000 sum into three separate accounts for the sole purpose of obtaining full FDIC coverage for each. Regulations stipulate that multiple corporate-owned accounts each must have an independent activity or purpose to qualify for $100,000 per-account insurance coverage. However, each owner can have a separate personal account insured up to $100,000. The owner of a sole proprietorship will not have her business accounts treated separately from her other personal accounts in the same institution for coverage purposes. If the total deposits in all accounts exceed the per-individual limit, the overage is not insured.

For a family living trust set up by parents to benefit their children, FDIC coverage is structured per individual, not per account. As such, if Tom and his four brothers were joint beneficiaries of a $500,000 family trust account, each brother's share would qualify for full $100,000 coverage. But if each brother was an equal beneficiary of a $750,000 trust account, and the bank failed, $50,000 for each brother would be at risk.

To avoid that eventuality, Tom's family should set up a separate account of $250,000 at a different FDIC insured bank, not a branch of the same bank.

In general, it's a good move to split up significant sums. For example, a couple with $1.3 million in a half-dozen accounts at two institutions should instead distribute the money among several accounts and institutions, despite the hassle factor. Often as parents age, their children produce grandchildren who can be included as beneficiaries in family trusts, thereby expanding the insurance coverage for each.

Finally, for those worried about retirement accounts such as self-directed 401(k)s, IRAs and Keoghs, coverage is up to $250,000 per account. Other types of accounts such as 403(b)s don't receive such preferential coverage, so individuals with large sums of retirement funds in a single institution should consult with the bank and financial advisers.

For detailed FDIC insurance coverage calculation, go online to www.fdic.gov/edie or call toll free 877-275-3342.

SOURCE: DailyBreeze.com in an article written by Stephanie Enright, Moneywise