Increasing FDIC insurance via beneficiaries

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Increasing FDIC insurance via beneficiaries

Postby johnanglemen » Wed Nov 21, 2012 9:49 pm

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?
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Re: Increasing FDIC insurance via beneficiaries

Postby NAVigator » Wed Nov 21, 2012 10:49 pm

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.]
Last edited by NAVigator on Wed Nov 21, 2012 11:33 pm, edited 1 time in total.
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Re: Increasing FDIC insurance via beneficiaries

Postby joe8d » Wed Nov 21, 2012 11:02 pm

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.
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Re: Increasing FDIC insurance via beneficiaries

Postby johnanglemen » Wed Nov 21, 2012 11:03 pm

NAVigator wrote: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.
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Re: Increasing FDIC insurance via beneficiaries

Postby NAVigator » Wed Nov 21, 2012 11:06 pm

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

Best wishes,
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Re: Increasing FDIC insurance via beneficiaries

Postby joe8d » Thu Nov 22, 2012 12:25 am

Totten Trust is what's it's called.
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Re: Increasing FDIC insurance via beneficiaries

Postby Alan S. » Thu Nov 22, 2012 12:44 am

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.
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Re: Increasing FDIC insurance via beneficiaries

Postby johnanglemen » Thu Nov 22, 2012 4:06 am

Alan S. wrote: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?
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Re: Increasing FDIC insurance via beneficiaries

Postby joe8d » Thu Nov 22, 2012 9:05 pm

Alan S. wrote: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.
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Re: Increasing FDIC insurance via beneficiaries

Postby FrugalInvestor » Thu Nov 22, 2012 9:30 pm

If you have a will you should also make sure your beneficiary and ownership designations are consistent with what it is intended to accomplish.
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Re: Increasing FDIC insurance via beneficiaries

Postby JDCPAEsq » Thu Nov 22, 2012 10:32 pm

joe8d wrote: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.
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Re: Increasing FDIC insurance via beneficiaries

Postby joe8d » Thu Nov 22, 2012 10:56 pm

JDCPAEsq wrote:
joe8d wrote: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.
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Re: Increasing FDIC insurance via beneficiaries

Postby johnanglemen » Fri Nov 23, 2012 11:12 am

Anyone have insight into the questions asked in the original post? Thanks all.
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Re: Increasing FDIC insurance via beneficiaries

Postby JDCPAEsq » Fri Nov 23, 2012 4:57 pm

johnanglemen wrote: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.
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Re: Increasing FDIC insurance via beneficiaries

Postby Alan S. » Fri Nov 23, 2012 6:53 pm

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.
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Re: Increasing FDIC insurance via beneficiaries

Postby johnanglemen » Fri Nov 23, 2012 6:58 pm

JDCPAEsq wrote: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?

JDCPAEsq wrote: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?
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Re: Increasing FDIC insurance via beneficiaries

Postby johnanglemen » Fri Nov 23, 2012 6:59 pm

Alan S. wrote:
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.
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Re: Increasing FDIC insurance via beneficiaries

Postby JDCPAEsq » Fri Nov 23, 2012 10:52 pm

johnanglemen wrote: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.
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Re: Increasing FDIC insurance via beneficiaries

Postby Alan S. » Sun Nov 25, 2012 10:44 pm

johnanglemen wrote:
Alan S. wrote:
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
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Re: Increasing FDIC insurance via beneficiaries

Postby dm200 » Sun Nov 25, 2012 11:01 pm

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.
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Re: Increasing FDIC insurance via beneficiaries

Postby Alan S. » Tue Nov 27, 2012 12:45 am

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
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