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FDIC Deposit Insurance: A Review

(Editor's Note: Legislation has again been introduced to change the limits of FDIC Deposit Insurance which, if passed, will initiate many questions from our depositors. We've determined a review is in order. We'll keep you posted about the changes.)

The Federal Deposit Insurance Corporation (FDIC) insures deposits in most banks and savings institutions. It pays deposit insurance to an institution's customers when a depository institution fails and must be closed by its chartering authority.

An Important Exception
Federal deposit insurance does not cover loss of deposits by fire, theft, or fraud. It also does not cover the contents of safe deposit boxes.

The basic FDIC insurance limit for a depositor is $100,000. In calculating the amount of an insured deposit, the principal is added to any interest earned.

Different Branches - Same Bank
The deposit insurance $100,00 limit applies to funds held by the same person in each federally insured institution, no matter how many are used. However, if a depositor's accounts are in two or more branches of the same financial institution, the funds in all of the accounts would be added together - or "aggregated" - for insurance purposes.

Different Banks - Same Company
However, if a parent company owns several FDIC-insured institutions, deposits at each institution are separately insured - despite the common ownership of the institutions - so long as each institution is separately chartered.

Deposits maintained by the same person in one federally insured institution are added together and insured up to $100,000, whether that person's name is on a single ownership account, a joint account or a trust account.

All Types of Deposits Covered
All types of deposits - whether they are certificates of deposit, checking accounts, savings accounts, money market or Negotiable Order of Withdrawal (NOW) accounts - are added together for the purpose of calculating insurance if they are held in the same name in the same ownership category, and in the same institution.

Single Ownership Category
The most common type of account is the individual, or Single Ownership account - funds owned by an individual, not a couple, a trust, or a corporation. All accounts owned by the same person and deposited at the same institution are added together and insured up to $100,000, including principal and any earned interest.

For example, if a depositor (let's call him Fred) has a $22,000 money market account, a $10,000 checking account, and a $72,000 certificate of deposit, these three accounts are added together for insurance purposes, and the total - $104,000 - is insured up to $100,000 - leaving $4,000 uninsured. If Fred realizes he has gone over the $100,000 limit with one financial institution, he may decide to withdraw enough funds to take him below the limit, and deposit the excess amount into another federally insured institution, where he will again insured up to $100,000 on accounts there.

Power of Attorney
Sometimes there can be more than one person that can withdraw funds from a single ownership account. For instance, there may be a power of attorney on the account. The person who holds the power of attorney has the right to withdraw funds, but although they have the ability to act on the owner's behalf, the power of attorney is not the owner of the fund.

In more rare instances, records may clearly indicate there are other signatories which are only "authorized signers" for convenience purposes. If the account records show that the other signers are not co-owners, the account will be insured as the sole owner's single ownership.

Sole Proprietorship
Funds of a sole proprietorship are insured as the single ownership funds of the person who owns the business. It is defined in FDIC's insurance regulations as a form of business in which one person owns all the assets of the business, in contrast to a partnership or a corporation. Thus, the deposits in the sole proprietorship account would be added to any other single ownership accounts owned by the same person, and the total is insured up to $100,000.

For example, suppose Fred also had a sole proprietorship account in the same financial institution with $26,000 in it, in addition to those we've listed above. He would now have a total of $130,000 in one bank, leaving $30,000 uninsured.

"Mom and Pop" Accounts
Many small family businesses are informal "Mom and Pop shops" with both signing the signature card. Unless the card is clearly marked that one is the owner and the other is an authorized signer only, these accounts are insured as either joint accounts or partnership accounts. So if Fred's wife, Wilma, is only a signer, not an owner, the balance in this account is added to Fred's other accounts. If her signature is on the card with no indication of her status, she is a co-owner on the account, and the account is now considered a joint account for insurance purposes, even though it is called a sole proprietorship account. It's important to decide which category the business account belongs to, because only then will you know what other accounts are added to it to calculate the FDIC insurance coverage.

Trust Accounts - Fred as Executor
Any other accounts Fred signs on should be very clear as to who the owner is. For instance, suppose Fred is an executor on an estate account. The account should be titled in the name of the decedent with Fred's name as executor (Estate of Charles Caveman, Deceased, Fred Flintstone, Executor) or, if Fred's name is to be used first, be sure his fiduciary capacity is clear (Fred Flintstone, Executor of Charles Caveman's Estate). If the account read simply, Fred Flintstone, Executor, the funds in the account would be added to his single ownership account for purposes of insurance.

To be continued...

Copyright © 2002 Bankers' Hotline. Originally appeared in Bankers' Hotline, Vol. 12, No. 4, 5/02

First published on 05/01/2002

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