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New FDIC Coverage Limitations

Author: Lona L. Feldman Date: 10/09/2008

Categories: Corporate and Business Law, Estate Planning and Administration

The Emergency Economic Stabilization Act, signed into law on October 3, 2008, has raised the Federal Deposit Insurance Corporation insurance limits on bank accounts in FDIC insured banks to $250,000 per covered account. This increase is effective for the period October 3, 2008 through December 31, 2009.

As a general rule, an individual can have $250,000 insured in his or her own name. In addition, two joint holders can have $250,000 each, for a total of $500,000 insured at the same bank in the joint account, even if they each have individual accounts there. Moreover, if an individual has a POD or trust account at the same bank, naming his or her three children as beneficiaries, he or she will be entitled to another $750,000 of coverage (one for each child). In addition, retirement accounts are insured up to $250,000.

Each separate business entity has a $250,000 insurance limit at a particular bank. As a result, if a business entity creates a new entity wholly owned by the first entity, it may be possible to increase the insurance limitation to $500,000 at a single bank. FDIC rules do provide that the entity needs to have a real business purpose however. In order to do this, for example, the John Smith Corporation would form the John Smith LLC, which is wholly owned by the John Smith Corporation. Both entities would have separate taxpayer identification numbers and be treated as separate businesses for purposes of the FDIC insurance rules. Thus, if both the John Smith Corporation and the John Smith LLC had accounts at the Enormous Bank, each entity would be covered by FDIC insurance for $250,000 for a total of $500,000 for both entities.

The FDIC computes its insurance based on the parent bank. Therefore, you cannot increase your coverage by having accounts in different branches of the same bank. If a bank is purchased by or taken over by another financial institution, and if you have accounts in both of those institutions, you would retain individual institutional coverage for all of your accounts for a period of six months after the purchase or take over.

The FDIC has provided a calculator so that any person can determine his or her insurance limitations. You can reach this calculator by clicking http://www2.fdic.gov/edie/index.html. In order to use this calculator, you only need to estimate amounts and do not need to put in your real identification numbers or the real names of the accounts.

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