Many Certificate of Deposit holders will have an easy time of calculating their federal (FDIC or NCUA) insurance. The FDIC and NCUA follow similar insurance coverage guidelines for calculating insurance on your accounts. If the owner has single-tenet account(s) (individual or business account), then $250,000 (through 12/31/13) is insured at the institution. This includes all CDs, savings accounts, checking accounts, and interest at the same credit union or bank.
This is also easy for IRAs (Individual Retirement Accounts). IRA CDs at financial institutions are insured up to $250,000.00 (permanent change in 2006). IRA accounts are insured separately from other accounts. IRA accounts are always single-tenet. There is no such thing as a joint IRA. Also, throughout the article, I'm assuming that you are considering accounts with an NCUA insured credit union or FDIC insured bank.
Now the exciting part. Some certificate holders have over $250,000 at each credit union and bank. In an effort to maximize the interest rates and/or simplicity, investors have opened large dollar accounts at their financial institution. The good news is, under the right circumstances, these additional funds will be insured. The bad news, as some account holders have found out during recent FDIC closures, is that the correct guidelines must be followed.
If you are a wife and husband, sister or brother, or really good friends, you can have up to $1,000,000 of insurance. This is accomplished by opening single-tenet accounts for each individual of $250,000 and then a joint-tenet account under both names for $500,000. The key to opening joint accounts is the title has both names separated by an "and". For instance, a husband and wife could use the title "Joe A. Doe and Sue C. Doe". Having up to $1,000,000 of federal insurance is not too complicated. Joint accounts are considered a different account type and insured separately from the above.
Insurance for Trust Accounts
To have even more funds FDIC and/or NCUA insured, you can open up formal or informal trust accounts. The FDIC and NCUA call them revocable trust accounts. These are considered a different type of account and are insured separately from all of the above. This is where it can get complex and really exciting. A formal trust account is usually set up with a title such as "Doe Family Trust" or "Joe A. Doe Revocable Living Trust". As a formal trust, it will have trust documents associated with it that are usually drawn up by an attorney and notorized. Generally, these accounts are insured up to $250,000 for each beneficiary. There are a few key things to note.
A formal trust must be titled at the bank correctly. Common naming conventions are to use the words "Family Trust", "Living Trust", or "Revocable Trust". Multiple formal or informal trust accounts with slightly different account titles do not qualify for additional insurance. If the owners and beneficiaries are the same, they are treated the same.
If an owner of the trust passes away, the account has a six-month grace period where insurance coverage is maintained.
If a beneficiary passes away, there is no grace period. For example, the trust has $750,000 with three beneficiaries. It is fully insured. If one of the beneficiaries passes away it is only insured up to $500,000. The account would need to have a new beneficiary added to maintain the $750,000.
The old rules indicated that the beneficiaries had to be qualifying and were defined as a spouse (husband or wife as defined by the FDOMA), child (includes adopted and step-children), grandchild, parent (not in-laws), or sibling. However in September 2008 the FDIC removed this requirement. The main reason was really to simplify things for them. They were beginning to face large bank closures and it just took too much time to try to determine if someone's beneficiaries were qualifying or not.
Informal trust accounts are very similar to formal trusts. They are considered the same account type. So if you open an informal trust account that is structured the same as a formal trust, it will not have additional insurance. The key with informal trusts is the titlhng. Here there is a slight nuance between the FDIC (banks) and NCUA (credit unions). The FDIC says the title must contain the words "payable upon death", "in trust for", "as trustee for" or the corresponding abbreviations ("POD", "ITF", "ATF") in addition to the bank's deposit records identifying the beneficiaries. The NCUA says the credit union's deposit account records identifying the beneficiaries is enough. If any of you need a beneficiary, I will gladly volunteer my services.
Here are some examples. A father opens a CD for $250,000 under his name. He also opens a second CD for $750,000 and the CD is titled, "John Smith POD". The second account clearly has three of his children identified as beneficiaries. Many people list the beneficiaries on the title, but depending on the length of the names or the number of them this may not be possible. All $1,000,000 would be insured. If he had more than that he he could open other accounts at another credit union or bank and be completely insured. He would be managing far fewer accounts at less institutions this way.
And a final example. A husband and wife have three children and two grandchildren. They also have saved and saved and saved some more. As a result they have $3MM they want to put into a CD. They also want to transfer both their 401Ks to IRA CDs. Each one is $250,000. That is a total of $3.5MM they need to invest, but they don't want to deal with umpteen different banks. Note: they may want to use a service (hint, hint, wink, wink) at this point. Can it all be insured? Yes, it can. First, the easy accounts. John and Sue each deposit $250,000 into CDs under their own names. Second, they open a joint-account for $250,000. Next, they open up two IRA CDs, each for $250,000. That leaves $1.5MM, piece of cake. This can be handled by a formal trust that is owned by the husband and wife. The trust would name the children and grandchildren as equal beneficiaries. It can also be set-up as a POD account. In this case the CD title would be "John A. Smith and Sue B. Smith POD" and the bank's deposit records would clearly identify the beneficiaries.
Summary
In summary, the FDIC and NCUA insure deposits based on type. Single-tenet accounts are insured up to $250,000. Join-tenet accounts are insured up to $250,000 for each individual in the account title. IRA CDs are insured up to $250,000. Finally, trust accounts are insured up to $250,000 for each beneficiary. Each type is considered separately for insurance purposes. Accounts at multiple banks are separately insured. Remember the $250,000 insurance limit expires 12/31/13 unless Congress extends it or makes it permanent. So watch your maturity dates on those CDs.
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