Asset Protection in Uncertain Times Part One: FDIC Insurance

Nearly every day now, newspapers and televisions are blasting us with information about how bad the economy is. We are in the worst economic crisis since at least the Great Recession of 2008, and possibly the worst since the Great Depression of the 1930’s! In the midst of this financial crisis, what can you do to protect your own assets?

To start with, make sure your savings are secure. Banks have been failing and others will fail. As I’m writing this column, the biggest news is the failure of Silicon Valley Bank (SVB), which was taken over by regulators on March 10, 2023. SVB was the primary bank for many, if not most, of the technology start-up companies that were funded by venture capital investors. With all of the investments into tech companies recently, SVB had a lot of cash deposited in the past few years. They wanted to make a return on their investments, so they bought long-term U.S. Treasury Bonds (with locked in interest rates), which they thought were safe.

However, because of all of the money printing during the pandemic, and the resulting inflation, the Federal Reserve Bank has been raising interest rates. Now that a new Treasury Bond can be purchased that pays a higher interest rate, the Bonds that SVB purchased in the past few years aren’t as attractive (because they’re locked in receiving the prior lower interest rates), and SVB would have to take a loss if they want to sell those Treasury Bonds before the full maturity date (many years down the road). Unfortunately, many of their customers are feeling the final pinch like we are on account of inflation, and have begun to withdraw funds from the bank. Because SVB locked in too much money at low interest rates, they had to “cash-out” some of these long-term bonds early and at a loss to pay out their customers’ withdrawals. This leaves SVB in a pickle, where their remaining assets are not worth enough (at today’s values) to offset their liabilities and pay back all customer deposits.

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 after thousands of banks failed in the late 1920’s and early 1930’s. It is an independent agency of the federal government. Make sure that your bank is insured by the FDIC. Insured banks must display an official FDIC sign at each teller window. Credit Unions have similar insurance and display an NCUA sign. The FDIC is the regulatory body that took over SVB this past week.

The FDIC insures the following kinds of accounts at banks: 1) checking accounts; 2) savings accounts; and 3) certificates of deposits. The FDIC also insures money market deposit accounts, but not money market mutual fund accounts. If you have a money market account, find out whether it is insured. The FDIC does not insure stocks and bonds, mutual funds, annuities or life insurance policies.

The FDIC used to insure accounts up to $100,000 per depositor. Because of financial crisis, on Oct. 3, 2008, the insured amount was temporarily increased to $250,000 per depositor, until Dec. 31, 2009. Like many temporary government measures (such as Nixon taking us off the Gold Standard on August 15, 1971), this “temporary” government action was made permanent, and we still have $250,000 of insurance coverage for bank deposits now in March of 2023.

You can have up to $250,000 of insurance coverage for each category of ownership. The categories of ownership include: 1) single accounts (accounts owned by one person); 2) retirement accounts (IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, Section 457 deferred compensation accounts, self-directed defined contribution plan accounts, and self-directed Keogh plan accounts); 3) joint accounts (all co-owners must be individuals with equal rights to withdraw deposits); and 4) trust accounts (including payable-on-death or “POD” accounts). Recent rule changes combined the previously separate “revocable trust” and “irrevocable trust” accounts into one category for FDIC Insurance purposes. These changes allow each Grantor (maker of a trust) to have up to $250,000 of protection per beneficiary of each trust up to a maximum of $1,250,000. It sounds complicated, but it just allows an additional $250,000 of coverage per beneficiary, for up to 5 beneficiaries when it comes to trusts.

All the accounts at the same bank in the same category are counted to see if you exceed the $250,000 (or $1,250,000 for trusts) figure. For example, suppose you have at the same bank the following accounts in your name only: checking account with $50,000; savings account with $100,000; two (2) certificated of deposit for $100,000 each. The total is $350,000. Only $250,000 is insured. The extra $100,000 is not insured. Suppose you also have at that same bank an IRA with $100,000 and a Roth IRA with $50,000. Both IRAs fall within the “retirement account” category. Since the total of both IRAs is less than $250,000, they are fully insured.

Suppose you also have at the same bank a joint account with your husband holding $200,000, a joint account with your daughter with $200,000 in it, and another joint account with you, your husband and your daughter containing $300,000. The total of your share of these accounts is $300,000 (1/2 of the joint account with your husband is $100,000, 1/2 of the joint account with your daughter is $100,000, and 1/3 of the join account with both husband and daughter is $100,000). Only $250,000 of the $300,000 is insured. $50,000 of your joint holdings is not insured.

The fourth category, “trust accounts,” is different. The rules used to be more complicated. On Oct. 8, 2008, the FDIC issued a simpler interim rule, and recently the rules have changed to be simpler yet again, combining revocable and irrevocable trust categories. Under the current rules, if the accounts in the name of your trusts (plus all POD accounts) at one bank total $1.25 million or less, the amount of FDIC insurance coverage is determined by multiplying $250,000 by the number of your beneficiaries (up to 5). For example, suppose your revocable living trust says that upon your death your assets will be held for the benefit of your spouse, then after your spouse’s death, the assets will be distributed equally to your two children. Your trust has three beneficiaries. $250,000 x 3 = $750,000. Therefore, you can have up to $750,000 in accounts in the name of your revocable and/or irrevocable trust(s) at one bank, and it will all be insured!

This column is for general information only and is not tax or legal advice. The facts of your case may change the advice given. Do not rely on the information in this column without consulting an estate planning specialist.