Pursuing High Rates on Your Savings: FDIC and Risks

Just remember — the higher the rate they are willing to pay the higher the risk you are taking. There are exceptions, because of the issues of perceived risk versus actual risk. The same caveat holds true for low rates — just because it is a very low rate doesn’t mean that it is safe. Banks do fail and FDIC insurance works fairly well, but you need to be well-documented and you need to be prepared to re-invest in what will be lower rates of return. 

The following article I found to be particularly helpful in assessing the risks and following the somewhat roundabout procedures of applying to the FDIC for your money up to the allowed maximum. I did find that the time for refunds to reach you is much shorter than I had thought.

Rate uncertainties
How secure are those high-yield bank interest rates?
PALM BEACH GARDENS, Fla. (MarketWatch) — Generous interest rates on deposits have been promoted by the very institutions that lately are cited in the news for financial troubles.
Are these institutions safe? Beware that if one fails and the FDIC takes it over, an assuming institution may cut your interest rate dramatically — even if you’re locked into a long-term Certificate of Deposit.

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If your rate is lowered, you will be allowed to withdraw your funds penalty-free within a specified time frame. But in a low-rate environment, you could face the unpleasant prospect of reinvesting your money at lower rates, despite the high yield you thought you had nailed.
Nevertheless, provided that your account is an FDIC-insured deposit, you should get your money, including accrued interest, as soon as possible if your bank fails. But be sure to abide by convoluted FDIC rules and make sure all your bank funds are covered in advance. Here are some major issues to consider:
  • Do business only with an institution that provides FDIC insurance on deposits. Not all do. Make certain your bank is FDIC-insured by searching the “bank find” tool at fdic.gov.
  • Stay within FDIC insurance limits, generally $100,000 per person per institution, but higher under some circumstances. A family of four, for example, can cover as much as $1.5 million by titling accounts so they fall into separate account categories. For more information on specific categories, go to this FDIC page.
  • If you invest in a deposit through a broker, be sure he or she is reputable, keeps good records and is responsive. FDIC deposit payouts have been delayed when brokers failed to quickly provide the FDIC with necessary records. Sometimes your funds could pass through more than one broker, a factor the FDIC needs to know. Also, you may find yourself exceeding FDIC insurance limits if you have other funds at the same failed bank to which your broker transmitted funds.
  • Your investment at a bank must be a deposit, such as a CD, checking account or savings account. Securities, such as stocks, bonds, mutual funds and annuities, are not FDIC-insured.
  • Don’t neglect your FDIC-insured accounts or you could lose your rights to them. If your bank fails, you have 11-1/2 years to claim your deposit account, or it becomes the property of the FDIC. If there’s no activity for 18 months from the date of your bank’s failure, the FDIC turns the funds over to the state’s unclaimed property division. Federal rules require that after 10 years, states must return unclaimed deposits to the FDIC.
Deposits returned within days
FDIC spokesman David Barr said that in most cases, depositors are reimbursed the next business day after a bank fails. He says the longest FDIC employees can remember depositors losing access to their funds was in the 1999 failure of First National Bank of Keystone, in West Virginia. Bank customers waited from Sept. 1 to Sept. 7.
So, what about assertions that the FDIC can take up to 99 years to repay? “Completely a myth!” Barr said. Some stockbrokers, he said, have perpetuated this misinformation in pitches to get clients.
If the FDIC can’t immediately find an acquiring institution, some checks may get returned for insufficient funds. But, Barr said, you often can work with the institution charging those fees to get them removed.
Is it safe to send money out of state if you have a power of attorney for someone else? Generally, geography doesn’t matter, said Steve Hartnett, associate director of education for the American Academy of Estate Planning Attorneys in San Diego. “A bank account would be governed by rules of the domiciled at death,” he said.
Nevertheless, “I don’t know that I would want my money in an institution that’s going to go under,” Hartnett said, because there might be a “hassle factor.”
No exceptions
One of the greatest problems in bank failures relates to revocable trust accounts. Those accounts, which many people use to secure more FDIC insurance coverage, too often get opened “in trust for” disallowed beneficiaries.
Revocable trust beneficiaries qualify for separate FDIC insurance coverage only if they are parents, siblings, spouses, children or grandchildren. They can’t be a “significant other” or a “niece or nephew.”
If you incorrectly name your niece or nephew, deposits in those accounts could be lumped with other deposits in your name, and inadvertently put you over the insurance limit.
Another problem may occur if your bank fails and you’re leaving money to a qualified beneficiary who is a minor. State laws typically prohibit you from leaving $100,000 to a 10-year-old.
“You probably need a guardianship,” Barr said. So be sure that you first contact a lawyer or estate planner.
The FDIC, Barr said, makes no exceptions for mistakes.
Spouses Gail Liberman and Alan Lavine are syndicated columnists. Their latest book is “Quick Steps to Financial Stability” (Que/Penguin). You can contact them at www.moneycouple.com. End of Story

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