The SPIC – What you Need to Know about Your Money’s Security

The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency of the United States government that was created in 1933 to promote public confidence and stability in the nation’s banking system. The FDIC protects you against the loss of your deposits if an FDIC-insured bank or savings association fails. FDIC deposit insurance covers the balance of each depositor’s account, dollar-for-dollar, up to the insurance limit, including principal and any accrued interest through the date of the insured bank’s closing.

The FDIC insures depositors of an insured bank for up to a total of $100,000, which includes principal and accrued interest. Deposits in separate branches of an insured bank are not separately insured. However, deposits maintained in different categories of legal ownership at the same bank can be separately insured. Additionally, deposits in one insured bank are insured separately from deposits in another insured bank.

In the event of a bank failure the FDIC notifies each depositor in writing, using the depositor’s address on record with the bank. This notification is mailed immediately after the bank closes. Additionally, when a failed bank is acquired by another bank; the assuming bank also notifies the depositors.

In the event of a bank failure where there is no bank acquirer for the deposits, federal law requires the FDIC to make payments of insured deposits “as soon as possible” upon the failure of the insured institution. It is the FDIC’s goal to make deposit insurance payments within two business days of the failure.

If there is an acquiring bank, it will accept the checks and deposits slips of the failed bank for a short time. You will receive information about new checks and deposit slips from the acquiring bank.

If you have more than $100,000 in a closed bank and you are paid $100,000 by the FDIC, you will be given a “Receiver’s Certificate” for the balance in the account and you would then receive payments on the balance of the account as the assets of the bank are liquidated.

Deposits maintained in different categories of legal ownership at the same bank can be separately insured. Therefore it is possible to have deposits of more than $100,000 at one insured bank and still be fully insured.

The categories of legal ownership are as follows:
Single Accounts
Certain Retirement Accounts
Joint Accounts
Revocable Trust Accounts
Irrevocable Trust Accounts
Employee Benefit Plan Accounts
Corporation/Partnership/Unincorporated Association Accounts
Government Accounts
The most common ownership categories are Single Accounts, Self-Directed Retirement Accounts, Joint Accounts, and Revocable Trust Accounts. The following paragraphs provide details on these more common legal ownership categories.

Single Accounts – a single account is a deposit owned by one person. All single accounts owned by the same person at the same insured bank are added together and the total is insured up to $100,000. Single accounts include:
Accounts held in one person’s name alone
Accounts established for one person by an agent, nominee, guardian, custodian, or conservator, including Uniform Transfers to Minors Act accounts, escrow accounts, and brokered deposit accounts
Accounts held in the name of a business that is a sole proprietorship
Accounts established for a decedent’s estate
Certain Retirement Accounts – these are deposits owned by one person and titled in the name of that person’s retirement account. Certain Retirement Accounts are added together and the total is insured up to $250,000. Certain Retirement accounts include:
All types of IRA’s, including, Traditional IRA’s, Roth IRA’s, Simplified Employee Pension (SEP) IRA’s, and SIMPLE IRA’s
All Section 457 deferred compensation plan accounts
Self-directed defined contribution plan accounts, such as self-directed 401(k) plans, self-directed defined contribution money purchase plans, and self-directed defined contribution profit-sharing plans
Self-directed Keogh plan accounts
The FDIC defines the term “self-directed” to mean that plan participants have the right to direct how the money is invested, including the ability to direct that the deposits be placed at an FDIC-insured bank.

Note – Naming beneficiaries on a retirement account does not increase deposit insurance coverage.

Joint Account – a joint account is a deposit owned by two or more people. To qualify for insurance under this ownership category, all of the following requirements must be met:
All co-owners must be people. Legal entities such as corporations, trusts, estates, or partnerships are not eligible for joint account coverage
All co-owners must have equal rights to withdraw funds from the account
All co-owners must sign the deposit account signature card unless the account is a CD or is established by an agent, nominee, guardian, custodian, executor or conservator
If all of these requirements are met, each co-owner’s share of every account that is jointly held at the same insured bank is added together with the co-owner’s other shares, and the total is insured up to $100,000.

Revocable Trust Accounts – A revocable trust account is a deposit owned by one or more people that indicates an intention that the deposits will belong to one or more named beneficiaries upon the death of the owner(s). A revocable trust account can be revoked or terminated at the discretion of the owner. A revocable trust account includes “payable-on-death” (POD) accounts and “in trust for” (ITF) accounts. The beneficiaries of these accounts must be “qualifying,” meaning that the beneficiaries must be the owner’s spouse, child, grandchild, parent, or sibling. Adopted and step children, grandchildren, parents, and siblings also qualify. In-laws, cousins, nieces and nephews, friends, charitable organizations, and trusts do not qualify.

Deposit insurance coverage is based on each owner’s trust relationship with each qualifying beneficiary. Each owner of a revocable trust may be entitled to insurance coverage up to $100,000 for each qualifying beneficiary that the account owner designates in the revocable trust account. If all of the beneficiaries are qualifying and have equal interests, the insurance coverage for each owner is calculated by multiplying $100,000 times the number of qualifying beneficiaries. In addition, if the trust specifies different interest for the beneficiaries, the owner is insured only up to each beneficiary’s actual interest in the trust.

All funds attributable to non-qualifying beneficiaries are aggregated and insured up to $100,000 as the single account funds of the trust owner.

Irrevocable Trust Accounts – Irrevocable trust accounts are deposits held by a trust established by statute or a written trust agreement in which the grantor (creator) contributes deposits or other property and gives up all power to cancel or change the trust. An irrevocable trust may also come into existence upon the death of an owner of a revocable trust.

The interests of a beneficiary in all deposit accounts established by the same grantor and held at the same insured bank under an irrevocable trust are added together and insured up to $100,000 only if all of the following requirements are met:
The insured bank’s deposit account records must disclose the existence of the trust
The beneficiaries and their interests in the trust must be identifiable from the bank’s deposit account records or from the trustee’s
The amount of each beneficiary’s interest must not be contingent as defined by FDIC
The trust must be valid under state law
A beneficiary does not have to be related to the grantor to obtain insurance coverage under the irrevocable trust account category.

The following are situations where an irrevocable trust would not be insured on a per beneficiary basis, resulting in the trust as a whole qualifying for only $100,000 in insurance coverage:
The trust agreement does not name the beneficiaries or provide any means of identifying the beneficiaries
The trust agreement provides that a beneficiary will receive no assets unless certain conditions are satisfied
If the trust provides that a trustee may invade the principal of the trust with the result that the assets available for the other beneficiaries may be reduced or eliminated
The trust agreement provides that a trustee or particular beneficiary my exercise discretion in allocating assets among the beneficiaries, with the result that the future distribution to each beneficiary is impossible to predict
Since irrevocable trusts often contain conditions that affect the interests of the beneficiaries or provide a trustee or a beneficiary with the authority to invade the principal. For this reason, deposit insurance for an irrevocable trust account is usually limited to a total of $100,000.

The FDIC does not insure money invested in stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities, even if they were bought from an insured bank.

The FDIC also does not insure U.S. Treasury bills, bonds, or notes, but those are backed by the full faith and credit of the United States government.

For more information on the FDIC, go to www.fdic.gov or call 1-877-275-3342.

Separate from the FDIC is the Securities Investor Protection Corporation (SIPC). In the event of a brokerage firm failure, the SIPC offers some protection; however, the SIPC is different from the FDIC. Where the FDIC insures all depositors at an FDIC-insured institution up to a certain dollar limit, the SIPC does not bail out investors when the value of their stocks, bonds and other investments fall for any reason. Instead, the SIPC restores funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms.

When a brokerage firm fails, the SIPC steps in and works to return cash, stocks, and other securities to the customers. This process can take from one to three months. Some investments that are not protected include commodity futures contracts, currency, and investment contracts, such as limited partnerships, that are not registered with the U.S. Securities and Exchange Commission under the Securities Act of 1933.

Customers of a failed brokerage firm get back all securities (such as stocks and bonds) that already are registered in their name or are in the process of being registered. After this first step, the firm’s remaining customer assets are then divided on a pro rata basis with funds shared in proportion to the size of claims. If sufficient funds are not available in the firm’s customer accounts to satisfy claims within these limits, the reserve funds of SIPC are used to supplement the distribution, up to a ceiling of $500,000 per customer, including a maximum of $100,000 for cash claims. Additional funds may be available to satisfy the remainder of customer claims after the cost of liquidating the brokerage firm is taken into account.

Source: MSW Group, PLC, CPA’s of Farmington Hills, MI. www.mswplc.com. For more information on the SIPC, go to www.sipc.org.