Banking in Times of Trouble
What To Do With Your Money to Ensure Its Safety
By Michael Eisenberg, CPA/PFS
Consider this situation: Your client and his wife recently sold their business. After all associated costs were taken into account, they were left with $1 million. In light of recent market activity and the instability in the banking sector, they are unsure of what do with this money to ensure it is kept safe for their future.
Solutions
Take it to the Bank: Most banks had been insured by the Federal Deposit Insurance Corporation (FDIC) for $100,000 in an account (or $200,000 for a spousal joint account). Recent changes have increased that amount to $250,000 for a single account and $500,000 for a joint spousal account. These changes have been placed into effect until December 2009, at which point Congress whether to extend the increased insurance. Similarly, credit unions are covered under a program called the National Credit Union Share Insurance Fund (NCUSIF). Your clients should check with their individual bank or credit union to determine if their institution is a member of the FDIC or the NCUSIF. In any case, though, depositing $1 million into any one account is unwise as your client could stand to lose a great deal of money should their bank fail.
Establish a Living Trust: If your client has children, they can set up a living trust that includes their children as beneficiaries. The trust can be insured for $100,000 per beneficiary. However, even with three children listed as beneficiaries, this will also only allow up to $300,000 to be insured. The rules regarding insurance coverage on living trusts is complex depending on the type of trust and how it is set up. If a client wishes to set up this type of account, they should check the rules at www.fdic.gov or speak to their adviser.
Certificate of Deposit Account Registry Service: This service, offered through participating banks, links banks that are each willing to place up to $100,000 of client funds into a federally insured certificate of deposit—up to a total of $50 million across member banks. According to the website (www.cdars.com), “You sign one agreement with a participating local bank or other financial institution of your choice, earn one interest rate, and receive one regular statement.” The FDIC will recognize your client’s $1 million as being insured in 10 different accounts, but your client won’t have to deal with multiple banks or multiple statements.
Other banks offer similar programs under different names. Your clients can check with their bank to see if it participates. If not, it might be worth it to them to look for another bank that does.
Retirement Accounts: Certain retirement plans, including IRAs and Roth IRAs, are insured up to $250,000. This insurance applies only to deposit accounts. Securities held in an IRA or other retirement account will not be covered by FDIC insurance.
Brokerage Firms: Your clients should also be aware that brokerage firms are not subject to the same regulations as banks. The Securities Investor Protection Corporation is the governmental organization protecting investors. For the most part, securities held by a brokerage firm are insured up to $500,000 (less any cash recovered), but money held strictly as cash is only insured up to $100,000 per account owner. There are exceptions to this rule as brokerage firms can choose to carry “excess SIPC insurance,” which can cover higher amounts, including cash up to $900,000.
For more information about protecting their money, direct your clients to the FDIC website at www.fdic.gov.
Remember, all situations are specific to each individual. There is no “one size fits all.” As an adviser, you should help your client determine the best course of action depending on their personal financial situation and objectives.
Michael Eisenberg, CPA/PFS is the owner of Michael M. Eisenberg Accountancy Corporation. He can be reached at Michael@eisenbergcpa.com. More personal financial planning resources can be found on the committee’s website, www.calcpa.org/Content/yoursociety/pfp.aspx and also from the PFP Committee page dedicated to the financial crisis.
