Payable on Death Accounts Can Increase FDIC Insurance

Getting around the $250,000 limit is easier than you think

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With the FDIC maintaining the $250,000 coverage limits on deposits held at a single financial institution, some retirees are having a hard time protecting all of their assets. That $250,000 limit includes everything - savings accounts, checking accounts, certificates of deposit, and money market accounts (which are different from the non-FDIC insured money market mutual funds). Still, with one easy-to-use trick, you can increase your total coverage limits to at least $1,250,000 by using something known as "payable on death" designations.

In essence, when you designate a bank account as payable on death, the person whom you've named is not entitled to any of the money until you pass away. When you do, however, they suddenly become the owner of the account. It bypasses your estate and is even more powerful than your last will and testament.

It is a type of revocable trust in that there is someone else who has a beneficiary interest in the account. That is the reason that these types of accounts are often referred to as the "poor man's trust fund." For virtually no paperwork and free cost, they achieve many of the same net effects of a basic trust fund. The assets in the account get to skip probate entirely.

Because of that beneficiary interest, the FDIC currently allows you to cover as much as $1,250,000 at a single financial institution by designating up to five (5) payable on death beneficiaries, none of whom can be covered for more than $250,000. An illustration might help you understand the basic mechanics of the strategy.

An Illustration of How Payable on Death Designations Could Increase Your FDIC Coverage Limits

Imagine you are a doctor. You have five grandchildren. You want to keep all of your money in a single bank, but still, want to sleep well at night knowing you are covered by FDIC limits. You don't want to deal with parking your money in Treasury bills, bonds, or notes. 

Instead of dumping $1,250,000 into a checking account or savings account, you would, instead, do something like this:

  • $250,000 certificate of deposit, designated payable on death to Jane Smith
  • $250,000 checking account, payable on death to Andrew Smith
  • $250,000 savings account, payable on death to Gregory Smith
  • $250,000 money market account, payable on death to Elizabeth Smith
  • $250,000 savings account, payable on death to Heather Smith

By doing this, if the bank were to fail in a catastrophic collapse, the FDIC would come in and restore the entire $1,250,000, which is 5x the ordinary coverage limits! To test if you are doing it correctly, take a moment to play around with the FDIC EDIE calculator (EDIE is short for "Electronic Deposit Insurance Estimator"), which will let you run scenarios to see if you are protecting your assets by showing how much cash you would recover in a bank closing.

A Handful of Drawbacks to Payable on Death Accounts

As with all things in life, there are some drawbacks to using the payable on death designation to increase your FDIC insurance limits on things such as savings accounts or certificates of deposit. Many states around the country have very strong laws on the process that must be followed if you ever change your mind and want to change the designated beneficiary on a payable on death account. Other parts of the country may even give you an odd look if you request such an account. Instead, you have to tell them you want a "Totten Trust."

For many people, in many situations, this is a small price to pay. The benefits of not only sleeping better at night due to the higher deposit insurance limits and skipping probate on the assets held in the account are too beneficial to pass over, explaining why so many people are fans of this approach. 

Just remember: You cannot override your payable on death instructions, which are a type of revocable living trust, with a will. If you name your son as the beneficiary on the account form, and then later leave the money to your daughter in your will, your daughter is going to receive nothing.

She has practically no recourse and the son isn't required to honor your last will and testament at all. The money is legally and lawfully his to do with as he pleases because the moment you passed away, the account became his personal property.

The moral: Be absolutely certain that you would be fine with the recipient of the payable on death account receiving the money because if anything happens to you, that is exactly what will occur. You also have to contend with the fact that the money will be unrestricted. If you're concerned about the habits of your beneficiary, consider a spendthrift trust fund instead.