Increasing FDIC insurance via beneficiaries

[johnanglemen]

I have a large lump sum of money that I will need to pay a tax bill in April. I would like to earn interest on it in a safe way between now and then via a high-yield savings account at Ally bank. The amount is multiples of $250,000, which is the current FDIC insurance limit.

My understanding is that you can increase FDIC insurance by adding Payable on Death (POD) beneficiaries to a saving account. In fact, the insurance increases by $250,000 for each beneficiary added. This seems like a fairly neat 'loophole' to me.

My questions are:

1. If the bank does fail, is the FDIC insurance paid out to the beneficiary, or to me?

2. Let's say I die before April. If the funds in the account are distributed to my beneficiaries, what happens to the tax bill I owed in the first place, which is now presumably owed by my estate? Or does the IRS get first dibs on the funds?

3. Anything else I'm missing here that makes this a bad idea?

[NAVigator]

I think you can only have multiples of the $250k limit based on ownership, not beneficiaries, according to
FDIC Deposit Insurance Coverage by account ownership category unless the money is held in a trust.

Jerry

[oops, a POD is an informal revocable trust. sorry.]

[joe8d]

According the FDIC website ( they have a calculator ) Ally Bank and other sources ,your FDIC coverage is a multiple of your POD beneficiaries.I checked and double checked because i'm in that category.Three POD's = 750 K FDIC in my case.

[johnanglemen]

I think you can only have multiples of the $250k limit based on ownership, not beneficiaries, according to
FDIC Deposit Insurance Coverage by account ownership category unless the money is held in a trust.

Thanks for the reply, although this is not correct. The $250K multiple is based on beneficiaries. The FDIC considers the presence of Payable on Death beneficiaries to constitute an "informal" trust that increases your coverage as far as I can tell. See FDIC: Your Insured Deposits for more information.

[NAVigator]

Indeed, I just learned of my mistake. You are correct a POD is an informal revocable trust. Thanks for setting me straight.

Best wishes,
Jerry

[joe8d]

Totten Trust is what's it's called.

[Alan S.]

One obvious risk with acquiring FDIC coverage with PODs is that if YOU expire before the bank does, the funds go to people who you might not otherwise intended to receive the funds. In other words, your insurance may come with a post death pitfall.

In some cases you could adjust the beneficiaries on other accounts such as retirement accounts to achieve the desired beneficiary shares, then adjust it again when the CD matures.

[johnanglemen]

One obvious risk with acquiring FDIC coverage with PODs is that if YOU expire before the bank does, the funds go to people who you might not otherwise intended to receive the funds. In other words, your insurance may come with a post death pitfall.

In some cases you could adjust the beneficiaries on other accounts such as retirement accounts to achieve the desired beneficiary shares, then adjust it again when the CD matures.

Right, but in this case I wouldn't mind the beneficiaries getting it. Plus I only need to stay alive til April I'm more concerned about what happens to the tax bill if I die (i.e. does that harm my relatives in some ways), as well as what happens if the bank fails instead of me! Do the beneficiaries collect the insurance funds or do I?

[joe8d]

One obvious risk with acquiring FDIC coverage with PODs is that if YOU expire before the bank does, the funds go to people who you might not otherwise intended to receive the funds. In other words, your insurance may come with a post death pitfall.

In some cases you could adjust the beneficiaries on other accounts such as retirement accounts to achieve the desired beneficiary shares, then adjust it again when the CD matures.

Changing PODs on Ally Bank accounts was a 1 minute process online.I had to do that earlier this year.

[FrugalInvestor]

If you have a will you should also make sure your beneficiary and ownership designations are consistent with what it is intended to accomplish.

[JDCPAEsq]

Totten Trust is what's it's called.

No, that's not a Totten Trust. A Totten Trust is "A in trust for B". The discussion is about a designated beneficiary using the POD Statute.
John

[joe8d]

Totten Trust is what's it's called.

No, that's not a Totten Trust. A Totten Trust is "A in trust for B". The discussion is about a designated beneficiary using the POD Statute.
John

You're the lawyer John. I was just stating what Ally Bank told me.

[johnanglemen]

Anyone have insight into the questions asked in the original post? Thanks all.

[JDCPAEsq]

1. If the bank does fail, is the FDIC insurance paid out to the beneficiary, or to me?

2. Let's say I die before April. If the funds in the account are distributed to my beneficiaries, what happens to the tax bill I owed in the first place, which is now presumably owed by my estate? Or does the IRS get first dibs on the funds?

3. Anything else I'm missing here that makes this a bad idea?

1. Paid to you. Only to the beneficiary if you die.
2. Any income taxes you owe for the year you die are debts of and paid from your estate. I'm not entirely sure I understand your question, however.
3. I think it's a crazy idea because of the risk of you dying.
John

[Alan S.]

3. Anything else I'm missing here that makes this a bad idea?

You need to make sure the beneficiaries are "qualified". For example, in laws, cousins,nieces and nephews, friends, and organizations do not qualify for additional limits.

[johnanglemen]

2. Any income taxes you owe for the year you die are debts of and paid from your estate. I'm not entirely sure I understand your question, however.

Well, I'm setting aside this money to pay a tax bill that will come due in April. If I die before then, and the money gets paid out to the POD beneficiaries immediately, then the estate would not have money to cover the tax bill. What then?

3. I think it's a crazy idea because of the risk of you dying.

Why is it crazy if the beneficiaries are family members that I might just gift to anyways upon my death?

[johnanglemen]

3. Anything else I'm missing here that makes this a bad idea?

You need to make sure the beneficiaries are "qualified". For example, in laws, cousins,nieces and nephews, friends, and organizations do not qualify for additional limits.

My understanding is that this is no longer a constraint. Any beneficiary who is a living person, or even a charitable organization, qualifies for the additional coverage.

[JDCPAEsq]

Well, I'm setting aside this money to pay a tax bill that will come due in April. If I die before then, and the money gets paid out to the POD beneficiaries immediately, then the estate would not have money to cover the tax bill. What then?

The IRS would have a lien on all your assets and could recover the tax from any of the beneficiaries.
John

[Alan S.]

3. Anything else I'm missing here that makes this a bad idea?

You need to make sure the beneficiaries are "qualified". For example, in laws, cousins,nieces and nephews, friends, and organizations do not qualify for additional limits.

My understanding is that this is no longer a constraint. Any beneficiary who is a living person, or even a charitable organization, qualifies for the additional coverage.

You are correct. My brochure is outdated and now being re cycled.
http://www.fdic.gov/deposit/deposits/in ... ml#require

[dm200]

Yes, the FDIC (and NCUA for federally insured credit unions) limits may be increased by used of POD designations.

In addition, or alternately, if there are two individuals (such as spouses, partners, friends, siblings, etc.), then individual and joint accounts can easily multiply coverage as well. Suppose "Pat" and "Chris" have the following accounts at XYZ Federal Credit Union:

"Pat" (individual savings) - balance $250,000
"Chris" (individual savings) - balance $250,000
"Pat" and Chris" (joint account with survivorship) - balance $500,000

The NCUA (federal) insurance on this $1,000,000 is the FULL $1 Million because individual and joint accounts are subject to separate $250,000 limits.

Finally, retirement accounts ((such as IRAs) have still a separate $250,000 limit.

[Alan S.]

More problems for Ally. Whatever you do with this bank, it would be unwise to breach the FDIC coverage limits:

http://finance.yahoo.com/news/rescap-cr ... 09921.html