Maximizing Your FDIC Coverage with Beneficiaries

For long-time readers of this blog, you know there are many ways to have FDIC coverage of more than $250,000 at a bank. However, as I described in past posts, you have to be careful. If you or your bank makes any mistakes, your money above $250,000 may not be covered. If the bank fails, that uninsured money could be lost.

In my post yesterday in which I described two problem credit unions and provided some NCUA and FDIC resources, the reader Lou posted a useful comment about a little known aspect of the FDIC rules which can make it easy for people to insure up to $1.25 million. In this post, I’ll provide more details about this.

First, it’s important to understand the following FDIC rules. The details are described in this FDIC Comprehensive Seminar on Deposit Insurance Coverage For Bankers. Unlike the guide for consumers, this guide for bankers includes more details and examples which can be useful to ensure you understand all of the rules. The guide is dated March 23, 2011 so it includes the recent changes that have occurred in the last few years including the new higher standard coverage of $250,000. Below are excerpts from the guide starting on page 31.

Beneficiary Requirements

The owner and beneficiary no longer must meet the kinship requirement that each beneficiary must be related to the owner from one of the following five groups: parent, sibling, spouse, child, or grandchild

The beneficiary must be an eligible beneficiary as defined below:

• A natural person (living)
• A charity (must be valid under IRS rules)
• A non-profit organization (must be valid under IRS rules)

Trust Relationship Must Exist in the Account Title

The required intention in paragraph (a) of this section that upon the owner's death the funds shall belong to one or more beneficiaries must be manifested in the “title” of the account using commonly accepted terms such as, but not limited to, “in trust for,” “as trustee for,” “payable-on-death to,” or any acronym therefor.

For purposes of this requirement, “title” includes the electronic deposit account records of the institution. (For example, the FDIC would recognize an account as a revocable trust account even if the title of the account signature card does not designate the account as a revocable trust account as long as the institution’s electronic deposit account records identify (through a code or otherwise) the account as a revocable trust account)

Coverage depends on the number of beneficiaries named by an owner and the amount of the deposit

The owner names five or fewer unique eligible beneficiaries and the total deposit(s) allocated to all beneficiaries combined is $1,250,000 or less, then the insurance coverage is:

• Up to $250,000 times the number of unique eligible beneficiaries named by the owner. This applies to the combined interests for all beneficiaries the owner has named in all (both informal and formal) revocable trust deposits established in each bank
• The result is the same as above even if the owner has allocated different or unequal percentages or amounts to multiple beneficiaries. To calculate the deposit insurance coverage, multiply $250,000 times the number of owners times the number of unique eligible beneficiaries

If the owner names more than five beneficiaries, it becomes more complicated. Refer to the FDIC reference if you’re interested in those details.

Easy Way to Insure up to $1.25 Million

For those trying to increase coverage above $250K, the last section is very important. The reader Lou noted this in the comments yesterday. It effectively makes it easy for you to have coverage of up to $1.25 million AND still have the ability to essentially leave it to just one beneficiary. There are two ways this can be done.

First, instead of equally dividing the money between beneficiaries, you can choose a custom allocation. For example, you can leave 99.6% to one beneficiary and 0.1% to each of four beneficiaries. Those other four beneficiaries could be friends or charities.

If the bank doesn’t allow you to divide the funds that will go to the beneficiaries in your own percentages, you can have separate accounts for each beneficiary. The FDIC will aggregate the accounts and treat them just as if they were one account.

I tested this out using the FDIC EDIE calculator with a fictional scenario. In this example, Ed Jones wants to cover $1.25 million, and he wants his wife Susan Jones to be the beneficiary who will receive all of his money when he dies. He sets up 5 CDs at the bank. The first CD has a balance of $1,249,600 with his wife as a beneficiary. The other 4 CDs have balances of only $100 each, and each has a separate beneficiary that meets the requirements as described above. I took a snapshot of the output of the EDIE calculator which shows that all $1.25 million is insured.



Note, there is one problem with the above example. It doesn’t allow any interest that accrues to be insured. You want to make sure the account balances remain insured until maturity. So instead of starting at $1.25 million, you’ll want to start with a smaller balance such as $1.1 million.

Another important note is that there is no grace period when a beneficiaries dies. You lose coverage immediately. That is one benefit of naming non-profit organizations or charities as beneficiaries. I guess it’s possible that the organization could go out-of-business, but for large organizations, I would think the chance is small.

Finally, you cannot extend coverage with beneficiaries for IRAs or other retirement accounts. This is a separate category from revocable trust accounts. Thus, without any beneficiaries, you can be fully insured at one bank with $250,000 in an IRA and $250,000 in an individual account.

As I mentioned in my post yesterday, it’s up to you to ensure all of your money is FDIC insured. It doesn’t matter to the FDIC if your bank made a mistake. So make sure you fully understand the FDIC rules as described in this FDIC insurance reference. The FDIC has a consumer assistance number of 1-877-275-3342 if you need more help.

The NCUA has very similar rules for credit union deposit insurance. You can review those rules in this NCUA insurance reference, and you can check your deposits using the NCUA’s Insurance calculator. If you need more help, you can contact the NCUA Consumer Assistance Center between 8 a.m. and 6 p.m. (EDT) at 1-800-755-1030 (press 1 for share insurance questions).

Ally Bank

Ally Bank makes it easy to implement the above strategy. First, the CDs don’t have minimum balance requirements. Second, I was told by the customer service rep that they allow up to 10 beneficiaries. Third, I was told you can list non-profit organizations as beneficiaries in addition to persons.

When you’re logged into your Ally Bank account, you can view the details of each account in a separate page. That page has an account title field. In my experience with Ally, your beneficiaries won’t be listed by default in this account title field. If you call or use the secure email, Ally can have your beneficiaries listed in the account title field with the POD or ITF designation. Based on what the FDIC listed above, this might not be required for electronic deposit account records. Nevertheless, since it’s easy to do, I think it’s well worth the effort.