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FDIC Insurance Pitfalls
Depositors of banks and savings institutions sometimes lose substantial sums because they have not taken care to keep their deposits within the Federal Deposit Insurance Corporation's (FDIC) insurance limit of $100,000. Following are some typical situations that have caused deposited sums to be left uninsured.
Overestimation of Coverage for Joint Accounts
A depositor does not have anew" $100,000 insurance limit for each joint account that he or she has with different parties. Instead, the FDIC totals each person's shares in all joint accounts at one institution and insures that sum up to $100,000.
Misunderstanding Coverage of Revocable Trust Accounts
The owner of a revocable trust account has the use of the money during his or her lifetime, after which the funds pass to specified beneficiaries. Each beneficiary's interest in such a trust is insured, up to $100,000, separately from any other accounts at the institution, but only if certain conditions are met. A beneficiary must be the depositor's spouse, child, grandchild, parent, or sibling. In addition, the $100,000 of insurance per beneficiary does not apply if the account owner puts conditions on the interests of the beneficiaries, such as requiring that they get a college degree or leaving payment up to a trustee's discretion.
Third-Party Deposits
Typically, an account owner is aware of all deposits made into the account. In some instances, however, such as the sale of a house or receiving money from a lawsuit, someone handling funds for the account owner will make a deposit into an escrow account at the same institution. When added to other accounts, such a deposit could put the account owner over the limit for insurance.
IRAs and Keoghs
It is a common misconception that retirement accounts are fully insured regardless of the amount. Instead, IRAs and self-directed Keogh funds are separately protected, up to a total of $100,000, from any nonretirement funds at the same institution. The Roth IRA is treated like a traditional IRA for purposes of deposit insurance. The new Education IRA is treated like an irrevocable trust account, not an IRA, for deposit insurance purposes. The overage depends on the terms of the document creating the Education IRA. It is prudent to review account balances and applicable FDIC rules periodically, or on the occurrence of events such as a death in the family, a divorce, a deposit of proceeds from the sale of a home, or a merger of two institutions in which the same person has accounts.
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