With the recent failures of Silicon Valley Bank on March 10, 2023, and Signature Bank on March 12, 2023, clients are asking whether their bank deposits are protected by Federal Deposit Insurance Corporation (FDIC) insurance. This client alert summarizes the standard FDIC insurance for individuals, trusts, and businesses, because each type of account and ownership category has unique rules. For more information on the FDIC’s unprecedented move to insure all funds for Silicon Valley Bank and Signature Bank customers, read our previous client alert from March 15, 2023.
Banking industry experts agree that banks are now much stronger than they were in 2008 and 2009 at the beginning of the Great Recession, but it is still important to be mindful of what FDIC insurance does or does not protect.
FDIC INSURANCE LIMITS AND COVERAGE
The standard FDIC insurance is $250,000 per depositor per insured institution. For individuals, there are potential ways to expand their total coverage of insured deposits at a single institution, depending on the types of accounts and how they are owned.
The FDIC insures checking accounts, savings accounts, money market deposit accounts, certificates of deposits, and cashier checks. However, the FDIC does not insure stock or bond investments, mutual funds, life insurance policies, annuities, municipal securities, safety deposit boxes or their contents, or U.S. Treasury bills, bonds, or notes. Those U.S. Treasury bills, bonds, or notes are instead backed by the full faith and credit of the U.S. government.
The FDIC website assures that since it began operations in 1934, no depositor has ever lost a penny of FDIC insured deposits. To find out if your bank is insured by the FDIC, do one of the following:
FDIC INSURANCE COVERAGE BY CATEGORY
Single Accounts. A single account is one that is owned by one person, in their own name, without any kind of designated beneficiaries. An account with a designated beneficiary, such as a “payable on death” designation, is instead treated differently under the revocable trust rules. A single account also includes one that is in the name of a sole proprietorship, for instance an account designated as “DBA” or “doing business as.” If an account identifies only one owner, but another person has signing authority with the right to withdraw funds from the account (for instance, pursuant to a power of attorney or custodian), it is still deemed to be a single ownership account.
The FDIC adds together all single accounts owned by the same person at the same bank, and insures the total up to $250,000.
Joint Accounts. If a joint account is owned by two or more people, and they meet the ownership criteria, then additional FDIC protection is provided. All co-owners of the joint account must be living people, they must each have equal rights to withdraw deposits from the account, and each must have personally signed (including by electronic signature) a deposit account signature card or the bank must have other records establishing co-ownership of the account. The owners of a joint account do not have to be related within a family. You cannot increase FDIC coverage by simply rearranging people’s names, social security numbers, or the styling of their names on multiple joint accounts.
If all those requirements are met, each co-owner’s share of every joint account that he or she owns at the same bank are added together, and the total is insured for up to $250,000 per person.
Certain Retirement Accounts. The ownership of certain retirement accounts is protected, but only if it is:
The FDIC adds together all retirement accounts listed above owned by the same person at the same bank, and insures the total amount up to $250,000. There are numerous types of accounts that do not qualify as a “Certain Retirement Account,” so it is important to dig into the details if this issue pertains to you.
Revocable Trust Accounts. A revocable trust account is a deposit account owned by one or more people that identifies one or more beneficiaries who will receive the deposits upon the death of the owners. A revocable trust can be revoked, terminated, or changed at any time by the owners. A revocable trust may be formal, under a written trust agreement created for estate planning purposes, or it may be informal such as an account with a “payable on death,” or “in trust for,” or a trustee account designation in the bank’s records.
In general, the FDIC insures the owner of a revocable trust account up to $250,000 for each unique beneficiary, but only if the following requirements are met:
Different calculation methods are applied depending on whether there are five or fewer unique beneficiaries, or six or more unique beneficiaries. If the trust has more than one owner, each owner’s insurance coverage is calculated separately.
Irrevocable trust accounts. A revocable trust that becomes an irrevocable trust account due to the death of the trust owner will continue to be insured under the rules for revocable trusts; however, different rules apply to an irrevocable trust account. An irrevocable trust account is one where deposits are held in an account established by statute or written trust agreement in which the owner contributes property, but gives up all ownership rights and power to cancel or change the trust.
The interests of a beneficiary in all deposit accounts under an irrevocable trust established by the same grantor or settlor and held at the same bank are added together and insured up to $250,000, only if the following requirements are met:
Because other restrictions often appear in an irrevocable trust agreement, especially if the trustee has broad powers or the beneficiaries’ interests are contingent, irrevocable trusts often are limited to a single $250,000 deposit account coverage.
Corporation, Partnership, Unincorporated Association Accounts. All the accounts owned by a business, including both for-profit and nonprofit organizations, are deemed to be held by the same ownership category. Accounts owned by the same business designated for different purposes are not separately insured. That means all operating accounts, payroll accounts, tax accounts, reserve accounts, and any other accounts established by the business for any reason are all combined together under the single ownership for FDIC insurance purposes.
Thus, all deposits owned by a corporation, partnership, or unincorporated association (whether for-profit or nonprofit) at the same bank are added together and insured only up to a total of $250,000. The business’s accounts are insured separately from the personal deposits of the business’s owners, stockholders, partners, or members.
If a business has separate divisions or units that are not separately incorporated, the business does not receive any additional FDIC insurance protection, even if each separate division or unit has its own bank accounts at the same bank as the primary business. Similarly, a business with multiple accounts at the same bank in different states does not receive any additional protection from FDIC insurance. The number of stockholders, partners, members, or other account signatories established by the business does not affect insurance coverage for the business.
Many of Ulmer’s business clients have called recently to explore whether or not they should diversify their deposit accounts among several banks when their deposit account balances exceed $250,000. But businesses often have unique issues that must be quickly examined. Businesses must first look at their existing loan agreements with the bank. Often such agreements require the business to maintain their operating account and other accounts at the lending bank. Deposit accounts are regularly pledged as collateral for the loan, and those accounts must remain exactly where they are located for that purpose. Many loan documents contain financial covenants, and the cash deposit accounts may be critical for that business to comply with those covenants. Without a loan amendment, the business may have limited rights to move any money to a different bank without defaulting under the loan agreement.
It also takes time, fees, costs, and logistics to diversify deposit accounts among multiple banks to stay under the $250,000 FDIC insurance coverage. Many business accounts are linked to customers, outside vendors, and suppliers, through which payments are received or made. The business may have sweep accounts, loan payment accounts, or lock box arrangements that tie various obligations together. Payroll accounts may be linked to a payroll service, which is critical to ensuring your employees are paid in a timely manner. Making a change to any of those accounts, even if permitted by the loan agreement, may be a daunting task. Once moved, coordinating the transfer of money between those accounts at different banks on an ongoing basis, without disrupting business operations, may require either a dedicated employee or a sophisticated software program to handle such a task.
Building an Individual’s FDIC Coverage. If individuals own multiple accounts at one bank that satisfy a number of the individual account categories described above, they potentially may build coverage exceeding $250,000. The FDIC publication, “Your Insured Deposits” includes, at Example 7, possible FDIC insurance coverage for a husband and wife, with three children, using the following categories, with total FDIC insurance coverage of $3.5 million:
For more detailed information about deposit account protection, please see the FDIC website at https://www.fdic.gov/resources/deposit-insurance/
Whether you are an individual or business needing additional guidance, or needing a full estate plan review to address the issues raised in this client alert, the attorneys at Ulmer & Berne are ready to assist you. For additional counsel on FDIC insurance coverage, please reach out to a member of Ulmer’s Banking & Commercial Finance Practice Group.