October 2008

Banking Sector Concerns Prompt Review of FDIC Insurance

UPDATED October 2008

Given the current publicity about troubles in the financial industry, some of our clients have called with questions about Federal Deposit Insurance Corporation (FDIC) insurance as it relates to individual and commercial accounts. Industry experts estimate that there could be several hundred bank failures over the next two years, and depositors should be aware of FDIC coverage limits.

Background
An independent agency of the United States government, the FDIC protects depositors against the loss of deposits made in an insured bank should that bank fail. FDIC insurance is backed by the full faith and credit of the U.S. government.

Effective October 3, 2008, the basic deposit insurance limit was raised, and depositors are now insured up to $250,000 per account at any single bank and up to $250,000 for certain retirement accounts. The increased deposit insurance limit of $250,000 is set to expire on December 31, 2009, and will then return to the former $100,000 limit. At this writing, Congress and the Treasury Department are considering a possible further expansion of deposit insurance limits, and depositors should check with their CB&H advisor or the FDIC Web site for further updates.

Please note that the rules governing retirement accounts, trusts, estates, employee benefit plan accounts and sole proprietorship business accounts are not assessed in this advisory bulletin. Readers should contact their CB&H accounting professional for further information on such accounts.

Personal Accounts
FDIC insurance is generally calculated by account registration and by institution. For example, if you want to insure $1,000,000 of bank deposits, you can split the money into four accounts of $250,000 each at four different banks and use the same account registration for each.

However, maintaining multiple accounts across different banks can be cumbersome, so many people look to expand their FDIC coverage within one bank. One way to secure FDIC coverage above $250,000 is to open multiple accounts under multiple registrations. For example, John Smith decides that he wants to cover his vast wealth with FDIC insurance, but he wants to maintain all accounts with one bank. He can do so by establishing multiple accounts in the following manner:

• Account # 1, in name of John Smith, has $250,000.
• Account # 2, in name of Ann Smith (John’s wife), has $250,000.
• Account # 3, in name of John and Ann Smith (joint account), has $500,000.
• Account # 4, in name of John Smith POD* John Smith Jr. (their son), has $250,000.
• Account # 5, in name of Ann Smith POD Jenny Smith (their daughter), has $250,000.

Each of these five accounts would be insured by the FDIC, and John and his family would have expanded their FDIC coverage to $1,500,000 all in the same bank.

* POD means “payable on death” and indicates a type of informal trust account.

Business Accounts
The rules governing the accounts of corporations, partnerships and LLCs are somewhat more basic than those governing personal accounts. All of a business entity’s accounts in the same bank are insured up to $250,000 regardless of how many accounts the entity may have. Furthermore, it does not matter whether some of the accounts are styled as a “payroll account,” “operating account,” etc. It also does not matter how many signers are on each account.

Many corporations, partnerships and LLCs regularly maintain more than $250,000 on deposit in their normal course of business. However, given the current bank environment, businesses should carefully consider the benefits of utilizing other strategies to minimize the risk of losing money in the event of a bank’s failure.

Most major banks have “sweep account” services that will sweep excess funds each day into a variety of investment vehicles such as money market accounts, repurchase agreements, commercial paper, or Eurodollar deposits. Though the commercial paper market is too volatile to recommend at present, repurchase agreements and some other investments do offer additional protection to the company. The fees associated with such sweep services (generally $100 to $300 per month) are a small price to pay compared to the possible loss of hundreds of thousands (or more) due to a bank failure when substantial uninsured deposits cannot be recovered.

Please contact the business and financial professionals at CB&H to help you determine what type of account arrangement may be optimal given your particular financial circumstances.

FOR MORE INFORMATION, PLEASE CONTACT:
John T.H. Carpenter, Principal
jthcarpenter@cbh.com
866.692.4264

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