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Estate Planning Information

Estate Planning: Protecting Your "Family Fortune" Through FDIC-Insured Bank Accounts

How to pass funds on to your heirs and make sure you're fully covered by federal deposit insurance, including new rules for "living trust" accounts

There are many reasons you've worked hard and saved money all these years, and one motivating factor is likely to be a desire to provide for your loved ones after you die. But have you given much thought to the best ways to pass along your built-up savings and other assets to your heirs?

There's a term for the process of organizing your financial affairs so that your money, property and other assets can go to your heirs with a minimum of costs, taxes and hassles. It's called "estate planning." For many of us, that probably means making and periodically updating a will. However, there are many different ways to help preserve assets for your heirs — trusts (specific arrangements for setting money or property aside for the benefit of another person), bank accounts, investments and so on — each with its own pros, cons and costs.

FDIC Consumer News can't advise you on what method of estate planning is best for you — that's more appropriate for an accountant, lawyer, financial planner or other advisor who is experienced in estate tax issues and estate planning. But we can help you think more about how you can use FDIC-insured deposit accounts to achieve your estate-planning goals. We also can help you understand how these different options are protected by the FDIC, including new, simpler rules for the insurance coverage of deposits held by a "living trust."

Why is FDIC insurance coverage an important factor to consider in your estate planning? If you are like most people who have saved for your retirement or your heirs, you are concerned about the safety of your money. That's one of the main reasons many seniors and other people put significant sums in FDIC-insured deposits. Regrettably, some depositors in recently failed banks were retired people who thought they were fully covered by FDIC insurance until their bank failed and they got the disturbing news that some of their money was over the federal insurance limit.

To help you better understand how bank deposits may be used to pass savings on to your heirs and how FDIC coverage works, here's an overview.

Payable-on-Death (POD) Accounts:
These accounts, sometimes called testamentary, Totten trust or in-trust-for accounts, can be set up at a banking institution with a simple, written declaration from you (usually on the "signature card" in the bank's records) that the funds will belong to one or more named beneficiaries upon your death. If properly titled, a traditional certificate of deposit (CD), other savings account or even a checking account can be set up as a POD account.

POD accounts and living trusts (described in the next section) are both types of "revocable" trust accounts, which are relatively flexible types of trust accounts in which the depositor retains the right to revoke the trust. "The word 'trust' suggests there are limits on your use of the money, but there are no real limits," says FDIC attorney Christopher Hencke. "The money is still yours to spend, save or invest, and you can even change your mind about who should inherit the funds."

Perhaps the biggest reason people establish POD accounts (and other accounts described in this article) is that, upon the death of the owner, the assets often can pass to loved ones without going through probate, which is the process of distributing your assets through an estate administrator. Avoiding probate can minimize delays, legal expenses or other potential problems (such as a contested will) in transferring assets to heirs. Depending on your state's laws, though, it's possible that a POD account may still be subject to the requirements in your will and probate proceedings.

Also, a POD account, unlike a living trust and certain other trusts, is simple and easy to establish, and there's no need to pay an attorney to draw up a formal trust document. "The simplicity of the payable-on-death account makes it the most common type of revocable trust account," says FDIC attorney Joe DiNuzzo. "A POD account has no trust agreement — the only documentation is the bank signature card on which the owner designates the beneficiaries."

Yet another attraction of a POD account (as well as a living trust) is that, in most cases, the FDIC's rules provide additional insurance coverage beyond the basic type of bank account. Here's how. Even though the depositor is recognized as the owner of the funds, the FDIC insures POD and other revocable trust accounts (including living trusts) up to $100,000 for each "qualifying" beneficiary ($200,000 if there are two qualifying beneficiaries, $300,000 if there are three, and so on). Which beneficiaries qualify? Under the FDIC's rules, they are a depositor's spouse, child, grandchild, parent or sibling. Stepparents, stepchildren, adopted children and similar relationships also qualify.

What happens if you name a non-qualifying beneficiary, such as a niece, nephew, cousin, in-law, friend or charitable organization? The portion payable to a non-qualifying beneficiary would be added to any accounts you have at the bank in the single (or individual) account category and that total will be insured to $100,000. Example: A $200,000 POD account naming the owner's two nieces as the beneficiaries would not be insured in the revocable trust category. Instead, the $200,000 would be insured as the depositor's single-ownership funds. The $200,000 would be added to any other single-ownership funds the depositor has at the bank and the total would be insured for $100,000.

If a POD account is owned by two people, FDIC insurance will be determined as if each co-owner had a separate account. This means if two parents have a joint POD account naming their three children as beneficiaries, it would be insured up to $600,000 (with $300,000 assigned to each parent).

These revocable trust accounts also are separately insured from any other accounts (individual, joint, retirement) that a depositor has at the same institution. But be aware that the POD accounts and other revocable trust accounts you have at one institution, including any living trust accounts, are added together for FDIC insurance purposes and covered up to $100,000 per qualifying beneficiary. For example, if a father has a POD account naming his son and daughter as beneficiaries and he also has a living trust account naming the same beneficiaries, the funds in both accounts would be added together and the total insured up to $200,000 ($100,000 for each qualifying beneficiary).

Living Trust Accounts:
As mentioned, a living trust account is comparable to a POD account in that you still have control over the money and the assets will transfer directly to the beneficiaries instead of going through probate. However, a living trust account is very different from a simple POD account in that the money is deposited in connection with a formal, legal document typically called a living trust or a family trust and drafted by an attorney.

Among the potential benefits of a living trust over, say, a POD account: It can be useful if you want to make sure that a particular beneficiary does not get unconditional control over your funds. For example, many people specify in living trusts that the bank deposit (or other property or assets) will pass to the named beneficiaries only when they reach a certain age or graduate from college. A living trust also can cover a variety of assets, not just bank accounts. And if you become ill and incapacitated, a living trust can allow someone else to manage your financial affairs.

However, experts warn that living trusts are not for everyone. Paying to draw up a living trust could cost hundreds or thousands of dollars, and sometimes the potential benefits may not outweigh the costs, especially depending on your state's inheritance laws and your financial situation. According to the Federal Trade Commission (FTC), "for some people, a living trust can be a useful and practical tool, but for others, it can be a waste of money and time."

The FTC also has warned that some people and businesses have exaggerated or misrepresented the benefits of living trusts, often in advertisements or seminars, to sell trusts or other products to people who don't need them. "Misinformation and misunderstanding about estate taxes and the length or complexity of probate provide the perfect cover for scam artists who have created an industry out of older people's fears that their estates could be eaten up by costs or that the distribution of their assets could be delayed for years," the FTC says. (See Living Trust Offers: How to Make Sure They're Trust-worthy)

Under the FDIC's rules, living trust accounts are insured the same as POD accounts — both types of accounts will be combined and insured for up to $100,000 for each qualifying beneficiary.

While the insurance rules for living trust accounts recently were simplified (see "New Insurance Rules for Living Trusts"), depositors still need to be careful. "That's because living trusts often contain provisions tailored to the owner's specific needs and desires about how the trust assets will be distributed upon his or her death," says Kathleen Nagle, a supervisor with the FDIC's Division of Supervision and Consumer Protection. "The terms of the trust can affect the insurance coverage, so it's important to understand how the FDIC's rules would apply to a particular living trust account."

For example, she says, some living trusts name "primary" beneficiaries who will inherit the trust assets when an owner dies as well as "secondary" beneficiaries in case a primary beneficiary dies before the owner passes away. Under the FDIC insurance rules, coverage is provided only for those qualifying beneficiaries who would be entitled to receive the trust's assets when the owner dies (generally the primary beneficiaries). Unless a primary beneficiary were to die before the owner passes away, no coverage would be provided for any secondary beneficiaries.

It also is important to note that FDIC insurance coverage "is based on the actual interest of each qualifying beneficiary in the living trust account," adds FDIC attorney DiNuzzo. "This means that if the beneficiaries have unequal interests in the trust — say, 50 percent of the assets are to go to the owner's spouse and 25 percent to each of his children — the FDIC will apply the $100,000 limit to each beneficiary's share." Also, as with POD accounts, any living trust deposits for non-qualifying beneficiaries (such as a cousin or nephew) would be insured with the depositor's individual accounts, not on a $100,000-per-beneficiary basis.

Joint Accounts:
These are deposit accounts — checking, savings or CDs — jointly owned by two or more people. A joint account indicating a "right of survivorship" allows the funds in the account to pass to the surviving co-owner without going through probate when one of the co-owners dies. With a joint account, the owners have access to the funds in an emergency or, for that matter, at any time.

In addition, each person's share in all joint accounts at an institution is protected by FDIC insurance up to $100,000. So, if two people own a joint account, and they had no other joint accounts at the same bank, that account would be FDIC-insured up to $200,000 ($100,000 for each owner), separately from other accounts (single accounts, PODs and so on) at the same bank. Note that to qualify for this coverage, every co-owner must have equal rights to withdraw funds and must sign the account's signature card at the bank (unless the account is a CD).

On the other hand, some people may not want to give joint ownership of funds to another person, no matter what the insurance benefits may be. "We always caution people not to open up joint accounts with others just to qualify for additional insurance coverage," says Nagle. "You need to remember that by establishing a joint account with another person, you are giving him or her equal ownership of the funds. This other person will have as much right to the money as you do, and you shouldn't take that fact lightly."

Retirement Accounts:
Thanks in part to Individual Retirement Accounts (IRAs), Keogh accounts (for the self-employed), employer-sponsored pension or profit-sharing plans, "401(k)" accounts and other vehicles that help Americans save for their golden years, it's possible to gradually accumulate a fairly large sum of money to pass along to your heirs. In general, you can expect that retirement funds you designate for beneficiaries will pass to those heirs without going through probate.

Under the FDIC's rules, your IRA and self-directed Keogh deposits (those over which you have control) at the same bank are added together and insured up to $100,000. Employee benefit-plan accounts (pension plans and profit sharing) at the same bank are typically insured separately from IRA and Keogh funds. In addition, these retirement accounts are insured separately from your funds in other types of deposit accounts, such as individual, joint and POD accounts.

But remember this: Retirement accounts — unlike POD and living trust accounts — do not qualify for extra coverage by adding additional beneficiaries. Insurance is capped at $100,000 per owner. To get more insurance for your retirement money, you'd need to divide the money among different insured institutions.

Final Thoughts
If you or your family has $100,000 or less in all your deposit accounts at the same insured institution, you don't have to worry — you're fully protected. But if you have funds at one institution totaling more than $100,000, you'd be smart to understand how to protect yourself with FDIC insurance. For example, each person's deposits in different ownership categories — single, joint, retirement, revocable trust (POD and living trust) accounts — at the same institution are each separately insured to $100,000. That means you could have far more than $100,000 at one insured institution and still be fully protected.

Also be aware that a change in your family's situation, such as a divorce or the death of an account owner or beneficiary, could significantly increase or, more often, decrease the amount of your FDIC insurance coverage.