On Oct. 3, 2008, President George W. Bush signed into law the much-heralded economic bailout legislation, the Emergency Economic Stabilization Act of 2008. Among its provisions, the act temporarily increases the basic insurance coverage limit provided by the Federal Deposit Insurance Corporation (FDIC) for depositors in banks and savings and loan associations from $100,000 to $250,000 per depositor through Dec. 31, 2009. After 2009, this amount returns to $100,000.

Here’s a summary of the new rules and an explanation of how to apply them. It may be trickier than you think—especially with revocable trusts.

But before we get into the nitty gritty, here are a few bottom lines: To minimize the risk of uninsured deposits for a joint revocable trust account, a good rule of thumb is to maintain an aggregate balance of no more than $500,000 for the trust and any individual joint accounts held at any one insured financial institution. For a one-grantor revocable trust, the aggregate balance for the trust and any individual single accounts should not exceed $250,000 at any one insured financial institution. When multiple trusts are concerned, the safest path, pending further guidance from the FDIC, is to limit the aggregate balance of all trust accounts at any one insured financial institution to $250,000 (or $500,000 if one or more of the trusts is a joint trust).

Depositors in all account categories should keep the balances in their deposit accounts low enough to leave some headroom for interest that may accumulate over time.

Let’s look at why we think these are the best approaches right now and where there are still some questions that the FDIC needs to answer.

What Does FDIC Insurance Cover?
Investors have a wide array of investment vehicles from which to choose, each with its own risks. An investor who deposits funds in certain accounts at certain financial institutions (such as banks, savings and loan associations or credit unions) is establishing a deposit account. Deposit accounts typically include checking accounts, savings accounts, negotiable order of withdrawal (NOW) accounts, money market deposit accounts, and time deposit accounts such as certificates of deposit (CDs). The terms of deposit accounts authorize the financial institution to use the deposited funds to make loans to other customers. Thus, deposit accounts are potentially at risk of default if the financial institution’s financial position becomes weak (for instance, due to poor loan portfolio performance). FDIC insurance was specifically designed to protect depositors from the risk of default that is unique to deposit accounts. This insurance is provided by “insured” banks and savings and loans. You can verify whether a particular financial institution is insured by using a service the FDIC provides online called “Bank Find,” or by calling toll-free 1-877-ASK-FDIC.

Note: this risk of default does not normally arise when an investor establishes an investment account to purchase and hold stocks, bonds, annuity contracts, mutual funds (including certain money market funds) or other investment products, even if the investment account is established at a bank or savings and loan institution, because the financial institution must hold each investor’s investments in the investor’s name and is not allowed to use the investments for loans or other investment activities.

Coverage Limit Ownership Categories.
Different coverage limit rules apply to several ownership categories. The coverage limit for any given ownership category is applied to the combined balance of all accounts in that category at any one financial institution. But if multiple accounts at the same financial institution fall into different ownership categories, the coverage limits are applied separately for each category, which may produce greater overall coverage.

There are seven common ownership categories: (1) single ownership accounts; (2) joint ownership accounts; (3) certain retirement accounts; (4) employee benefit plans; (5) accounts for corporations, partnerships or unincorporated associations; (6) accounts for “informal” and “formal” revocable trusts; and (7) accounts for certain irrevocable trusts. In addition, on Oct. 14, 2008, the FDIC created an umbrella, announcing that unlimited coverage will apply to (8) any account that is non-interest bearing, such as a checking account, regardless of ownership category.

Here’s a summary of the coverage limits for each of these categories: