The recent bank failures have led to a lot of buzz online pertaining to the safety of your bank deposits and FDIC coverage. While there has been a lot of great information being shared about how FDIC coverage works, there is one aspect that doesn't seem to be getting much attention, and that is how beneficiary designations can potentially increase the amount of FDIC coverage on your bank accounts.
It's important to mention that designating beneficiaries on any assets you own should always be in alignment with your estate planning goals. The following is not meant to be advice or a recommendation, but simply an explanation of one particular feature of FDIC protection. If this is something you need guidance on, be sure to talk to your financial advisor and/or estate planning attorney to determine how this could apply to your situation.
When it comes to beneficiary designations, retirement accounts and taxable investment accounts are usually updated appropriately, as that tends to be where the bulk of clients’ savings reside. However, bank accounts don't always seem to get the same attention or sense of urgency when it comes to properly titling those accounts, and they certainly should!
The FDIC coverage amount is currently $250,000 per depositor, per institution. Generally, this means your coverage at one bank might typically be no more than $250,000 regardless of the number of accounts you have if those accounts are all registered the same way (ie. in your name only). Joint accounts, assuming they are owned equally by the same two depositors, would typically be eligible for up to $500,000 in coverage.
Where things can start to get interesting is when you add beneficiaries to the accounts. As it pertains to FDIC protections, there are two ways beneficiaries can be designated on bank accounts:
- The first way would be to list them directly on the account as a POD (Payable On Death). This is a fairly straightforward process that typically just involves filling out a bank form.
- The second way would be to title your bank accounts in the name of a trust. Instead of listing beneficiaries directly with the bank, your beneficiaries are listed in your trust document. Updating a bank account in this way typically involves filling out a bank form and providing the bank with certain pages of your trust document.
The Beneficiary Multiplier
When an FDIC eligible bank account includes beneficiary designations, the coverage can be expanded up to $250,000 per depositor, per beneficiary, per institution. To help illustrate this concept, I've provided a few examples below of fictitious clients, Darlene and Elliot, who maintain large deposits at a fictitious bank, and included some screenshots from the FDIC’s Electronic Deposit Insurance Estimator (EDIE).
A $2,500,000 Example
Darlene and Elliot were previously employees at E Corp, received equity compensation, and were able to benefit from E Corp’s IPO last year. After cashing out some shares, paying some taxes, buying a house, investing for an early retirement, and financing a coup d'etat, Darlene and Elliot were left with $2,500,000 across their various savings accounts at E Corp National Bank, allocated in the following manner:
- Darlene’s individual account - $250,000
- Elliot’s individual account - $250,000
- Darlene and Elliot's joint account - $2,000,000
Concerned about what they had read regarding FDIC protection limits, they plugged their numbers into EDIE, which confirmed what they thought would be the case about having uninsured balances.
Scenario 1: Two Individual Accounts and One Joint Account - No Beneficiaries
According to EDIE, Darlene and Elliott would each have $250,000 of coverage on their individual accounts, and $500,000 of coverage on the joint account, leaving them exposed to $1,500,000 of uninsured balances.
Scenario 2: Two Individual Accounts and One Joint Account – Adding Four Beneficiaries
Since they don't have kids they decided to list two good friends and their two favorite qualified charities (qualified being the operative word), all as equal beneficiaries on all accounts. According to EDIE, that helped to reduce their uninsured balances to $500,000.
Scenario 3: Listing Each Other on the Individual Accounts as POD, Different Beneficiaries on the Joint Account
After reviewing their estate planning goals with their trusted financial advisor, it was suggested that they consider listing each other as primary beneficiaries on their individual accounts and listing their friends and the charities as contingent beneficiaries. On the joint account, it was suggested that they keep their friends and the charities as primary beneficiaries. Per EDIE, by changing the beneficial interests across the different account registrations, they were ultimately able to get their total combined balances of $2,500,000 at the same bank completely covered under FDIC protections!
- The calculations above assume that all of the above accounts are on deposit in an FDIC-insured bank, and that the account owners do not have accounts other than those listed above at E Corp National Bank.
- FDIC coverage applies to bank accounts, not investments.
- Coverage amounts can be diluted or reduced when multiple accounts are held at the same bank by the same depositor(s) or when beneficiary designations are not equal.
- Business accounts are typically only eligible for $250,000 since business accounts cannot be jointly owned or contain beneficiaries.
- The maximum amount of coverage available based on beneficial interest (via trust or POD) will be changing on April 1, 2024.
If you’d like to learn more about what you can do to protect your deposits please visit the FDIC Deposit Insurance Resource site or contact the FDIC at 1.877.275.3342. To see how this applies to your situation, you can also use the FDIC’s free Electronic Deposit Insurance Estimator (EDIE) to see what your actual coverage might be.
If you’d like to discuss how these concepts could fit into your financial plan, feel free to schedule a complementary consultation with me.
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