On September 17, 2008, $140 billion was drawn out of money market accounts by investors who were transferring their funds to U.S. Treasuries. And on September 18, 2008, the FDIC, realizing that money market accounts were being drawn down in record amounts, pumped over $100 billion into the system.

But after realizing that an influx of cash wouldn’t be enough to prevent a collapse, the Treasury stepped in with a $250,000 guarantee per money market account. If the Treasury hadn’t taken this action, $5.5 trillion could have been drawn out of the market, which could have collapsed the entire U.S. economy.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For previous coverage of money market accounts in Advisor’s Journal, see How to Increase the FDIC $250,000 Permanent Guarantee (CC 10-67).

For in-depth analysis of the Dodd-Frank Act, see Advisor’s Main Library: The Dodd-Frank Wall Street Reform and Consumer Protection Act: An Analysis.

Why is this Topic Important to Wealth Managers? This week we continue our series on “Wealth Management in Today’s Economic Environment”. The series is designed to address the specific question many wealth managers are currently asking: “what are the best investment, retirement and financial planning tools given the current global financial position?” We explore alternatives from “safe” to “risky” from “traditional” to “emerging” to discover and discuss the most relevant wealth management tools and techniques available today. We look forward to presenting this discussion and think you will find the information quite valuable. Please note that this series is presented in continuation starting with last week’s entries. That being said each blogticle resumes discussion from the previous day.

In September 2008, “investors started a money fund version of a run on the bank.” The figures represent that “nearly $200 billion cascaded out of money funds” before the Treasury stepped in to guarantee principal values of money market funds.  The approach is similar to the FDIC model. [1]

Generally, deposit accounts at an insured bank or saving association are fully insured up to $250,000. In addition, an individual may have more than $250,000 located at one bank and still be fully covered.[2] Moreover, federal law provides for insurance coverage of up to $250,000 for certain retirement accounts.

Thus, clients may generate minimal returns as a tradeoff to enjoy the safety provided by the FDIC guarantee on some savings vehicles.

Single Accounts, Joint Accounts, IRAs and other certain retirement accounts, and revocable trust accounts all provide for a maximum of $250,000 of insurance.  However, clients may qualify for more than $250,000 in coverage at one insured bank or savings association if the deposit accounts are classified to different ownership categories.

Payable on Death (POD) and  in trust for (ITF) accounts — also known as testamentary or Totten Trust accounts — are the most common form of revocable trust deposits. Generally, these “informal revocable trusts are created when the account owner signs an agreement — usually part of the bank’s signature card — stating that the deposits will be payable to one or more beneficiaries upon the owner’s death.” In addition, living trusts (or family trusts) are a more formal arrangement that may also utilize the FDIC insurance provisions.

Generally, deposit “insurance coverage for revocable trust accounts is provided to the owner of the trust.” Nevertheless, the actual amount of insurance coverage provided is based on the number of named beneficiaries.  In other words, each owner’s share of revocable trust deposit is insured up to $250,000 for each beneficiary (i.e., $250,000 times the number of different beneficiaries), regardless of actual interest provided to beneficiaries. Special rules also apply for revocable trust deposit accounts with more than six beneficiaries.

Example: a father owns a $750,000 POD account naming his two sons as beneficiaries, the account is insured for $500,000 — $250,000 for the interest of each beneficiary. The remaining $250,000 is uninsured.

The FDIC is an independent government agency that has been protecting Americans’ savings for 75 years. Created in 1933, the FDIC promotes public trust and confidence in the U.S. banking system by insuring deposits.

The FDIC insures more than $4.8 trillion of deposits in over 8,200 U.S. banks and thrifts—deposits in virtually every bank and thrift in the country. Throughout its 75-year history, no one has ever lost a penny of insured deposits as a result of a bank failure.

Our series continues tomorrow to continue to explore financial planning in today’s economy.

We invite your questions and comments by posting them below, or by calling the Panel of Experts.

Series Author: Benjamin Terner

---

[1] See Chris Farrell. Safe Investing in a Troubled Economy. Bloomberg Businessweek. September 25, 2008. http://www.businessweek.com/magazine/content/08_40/b4102063709852.htm. Last Accessed 6/6/2011.

[2] See generally Federal Deposit Insurance Company. Deposit Insurance FAQ. http://www.fdic.gov/deposit/difaq.html. Last Updated 07/20/2010. Last Accessed 6/6/2011.