In December, a DepositAccounts.com poll revealed some pretty shocking numbers. First, according to the poll results, DepositAccounts readers have invested an estimated $100 million or more in PenFed CDs since the major rate hike that went live in December. That’s one-tenth of a billion dollars! It is impossible to know for sure if every poll entry was accurate or the exact amounts deposited within each range (I used the midpoints for my calculations), but it’s also impossible to know how many others have invested in the PenFed CDs without submitting an answer on the poll. Maybe we have sent two-tenths of a billion dollars?
One of the other shocking parts of the poll was that 4% of the 375 participants noted that they had invested $2.4 million or more, and another 3% noted that they had contributed between $980,000 and $2.4 million. That’s a total of 26 people noting that they had invested over $980,000. Many questioned how this could be possible (or at minimum, how it could be wise) given the federal insurance limits, so I thought this would be a good time to revisit the possibilities for extending insurance coverage through the lens of this specific example.
How To Insure $1+ million in Deposits
Anyone who places a million or more into accounts at any one credit union or bank should make sure the deposits are fully federally insured. PenFed is a safe credit union with a health grade at DepositAccounts.com of an A. Nevertheless, it’s always a good idea to stay below the federal insurance limits (FDIC for banks and NCUA for credit unions).
The standard insurance amount is $250,000 per depositor and per bank or credit union. This amount used to be $100,000, but it was increased to $250,000 during the financial crisis. There are many ways to insure deposits over $250,000 at one bank. However, as I described in previous 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.
For the case of PenFed, there’s an easy way to insure deposits over $1 million. It’s by using revocable trust accounts which have terms like payable on death (POD). You can review the NCUA coverage and requirements for revocable trust accounts on page 24 of this NCUA "Your Insured Funds" guide.
The important feature of revocable trust accounts that allow them to be used to insure over $250,000 is described on page 27 of the NCUA guide. Here’s an excerpt:
When there are five or fewer beneficiaries, the maximum share insurance coverage for each trust owner is determined by multiplying $250,000 times the number of different beneficiaries, regardless of the dollar amount or percentage allotted to each different beneficiary.
I checked with PenFed about its beneficiary policies. Below is the information I received from PenFed:
PenFed does not have a maximum number of beneficiaries that can be listed on a single account. Charities may be listed as a beneficiary on an account; however, it is recommended that a full address and tax ID number be included to ensure PenFed is able to successfully identify the organization if necessary.
Based on the NCUA and PenFed rules, it’s easy to insure deposits of over $1 million. Thanks to DA reader Lou who first mentioned how to do this in 2011.
In the first scenario, a man has $1.25 million in deposits fully insured. He wants his wife to be a POD for the vast majority of the funds. To insure $1.25 million, he has five CDs with a different beneficiary for each CD. The big CD that holds the vast majority of his funds has his wife as the beneficiary. The other four CDs only hold PenFed’s minimum CD deposit of $1,000. Each has a different charity as the beneficiary. Each charity must be recognized by the IRS. Below is a snapshot of the estimator showing that no deposits are uninsured.
In the second scenario, a man is able to insure deposits of up to $3 million using joint accounts with beneficiaries. He and his wife are the co-owners of the joint accounts. They have one son, and they want him to be the primary beneficiary. He opens six joint accounts with his wife as the co-owner. One account is a joint account with no beneficiaries. The second joint account has his son as the beneficiary. The other four accounts are also joint accounts, each with a different charity (IRS recognized) as the beneficiary. The vast majority of the money is in the joint account with no beneficiaries and in the joint account with their son as the beneficiary. The other four joint accounts just have the CD minimum deposit of $1,000. Each has a different charity as the beneficiary. Below is a snapshot of the estimator showing that no deposits are uninsured.
Please note that there is one problem with the above examples. These examples don’t allow any interest that accrues to be insured. You want to make sure the account balances remain insured until CD maturity.
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.
Those 26 DepositAccounts readers who reported to have invested over $980,000 in PenFed CDs can keep all of their deposits federally insured if they set up accounts and specify beneficiaries as described above.
Before opening accounts and specifying beneficiaries, be sure to check the NCUA Share Insurance Estimator for credit union accounts and the FDIC EDIE calculator for bank accounts. Also, make sure you verify documentation from the institutions that properly identifies the beneficiaries. According to page 24 of the NCUA "Your Insured Funds" guide, "The account title or other account records of the credit union must indicate the account is held pursuant to a trust relationship." It’s up to you to ensure the credit union properly sets up the account.