FDIC Redux

[JohnH]

Somebody shoot me down on this one if it's a bad idea.
I'd appreciate any critique or criticism, as this is not a hypothetical and I may be called upon to justify my recommendation.

Taxpayer is an elderly single person with no children. Wants maximum protection for about $600K in cash - CD's only. Joint ownership of CD's and POD beneficiary designations are out of the question.

As I see it, the only options are as follows:
1) US Treasury Bills through Treasury Direct
2) Brokered CD's (such as CDARS).
3) Spread the money among 7 banks.
4) Set up an S-corp or LLC to keep the number of banks down to 3.

I'm inclined to go with # 4, because it offers maxiumum flexibility. Ignoring costs to prepare the returns, is there any advantage to using LLC rather than a plain vanilla S-corp? (I'm partly concerned that an LLC treated as a disregarded entity might not enjoy serparate FDIC protection, so it seems that even if an LLC is formed it would still need to report as an S-corp).

Any comments or thoughts would be helpful.

[DaveO]

Are the personal holding company rules a concern?

[JohnH]

Not with an S-Corp, but thanks for asking.

[Lion]

Ein

As long as the LLC (or S-corp or any other entity) has its own EIN, isn't it a separate entity as far as the FDIC is concerned? I have an FDIC pamphlet at work but not here.

By the way, I would vote for CDARS myself as slightly simpler for your client since the bank does the work of spreading out the CDs over the appropriate number of banks, right?

[ChEAr$]

Fwiw

Somebody shoot me down on this one if it's a bad idea.
I'd appreciate any critique or criticism, as this is not a hypothetical and I may be called upon to justify my recommendation.

Taxpayer is an elderly single person with no children. Wants maximum protection for about $600K in cash - CD's only. Joint ownership of CD's and POD beneficiary designations are out of the question.

As I see it, the only options are as follows:
1) US Treasury Bills through Treasury Direct
2) Brokered CD's (such as CDARS).
3) Spread the money among 7 banks.
4) Set up an S-corp or LLC to keep the number of banks down to 3.

I'm inclined to go with # 4, because it offers maxiumum flexibility. Ignoring costs to prepare the returns, is there any advantage to using LLC rather than a plain vanilla S-corp? (I'm partly concerned that an LLC treated as a disregarded entity might not enjoy serparate FDIC protection, so it seems that even if an LLC is formed it would still need to report as an S-corp).

Any comments or thoughts would be helpful.

#1 is good; that is, just as long as the U S gobment don't go belly up.

#3 is also good for an elderly person, single or not.

#4, use an LLC, cheaper to operate than a corporation; however.... if safety is the
principle concern, what would an LLC accomplish that spreading the risk won't among
7 banks? (Wachovia in Charlotte, maybe? grin)

My advice to one of my clients would be #3.

[S T]

Fdic

It doesn't seem that the FDIC pamphlet specifically addresses LLC entity if it is disregarded, only states Corporations, Partnerships, or unincoporated Associations, and the coverage maximum at any one bank is $100,000.

http://www.fdic.gov/deposit/deposits/insured/yid.pdf

Corporations, partnerships, and unincorporated associations, including for-profit and not-for-profit organizations, are insured under the same ownership category.
To qualify for coverage under this category, a corporation, partnership, or unincorporated association must be engaged in an “independent activity,” meaning that the entity is operated primarily for some purpose other than to increase insurance coverage.

Deposits owned by a corporation, partnership, or unincorporated association are insured up to $100,000 at a single bank, but are insured separately from the personal accounts of the entity’s stockholders, partners, or members. Accounts owned by the same corporation, partnership, or unincorporated association but designated for different purposes are not separately insured. Instead, such accounts are added together and insured up to $100,000.

For example, if a corporation has divisions or units that are not separately incorporated, the deposit accounts of those divisions or units would be added to any other deposit accounts of the corporation and the total insured up to $100,000. The number of partners, members, or account signatories that a corporation, partnership, or unincorporated association has does not affect coverage. For example, deposits owned by a homeowners association are insured up to $100,000 in total,
not $100,000 for each member of the association. Unincorporated associations typically insured under this category include churches and other religious organizations, ommunity and civic organizations, and social clubs.

Accounts in the names of sole proprietorships (for example, “DBA accounts”) are not insured in this category. Rather, they are added to the owner’s other single accounts, if any, at the same insured bank and the total is insured up to $100,000.
(See Single Accounts section.)

[JohnH]

I've run into the "separate EIN" situation before - you have to be careful about that one. It's the legal status of the entity that controls, not the EIN.

For example, a sole proprietor can have an account under the proprietorship's EIN and also personal accounts under his SocSec#, but he still has $100K coverage only on the total of all his accounts (personal and business added together). So the separate EIN does not automatically confer separate coverage.

That would lead me to believe the LLC (with its own EIN) might be OK, even if treated as a disregarded entity for tax purposes. However, as ST pointed out in another reply on this thread, FDIC hasn't caught up with current law in explaining certain things, especially their policy about LLC's.

[JohnH]

You nailed one of my concerns. Legally, an LLC is a separate entity, but if it's treated as a disregarded entity for tax purposes then I'm wondering if FDIC might see that as a loophole to waive off liabliity if they so choose. If the economic situaiton gets worse and there is a cascade of bank failures, FDIC may be forced to go into a mode in which they look for reasons to exclude coverage, rather than provide it in ambiguous situations.

(Looking closely at the FDIC site, it's clear that recent events have caused them to clarify some of their rules. I don't think their "clarifications" are simply to edify everyone's knowledge - they are probably coming to the realization that there's lots of misinformation out there; much of it being spewed by uninformed bankers.

[thomtax]

Possible new law

John - this would not help now, but my understanding is that, IF they get the "bailout" law passed, they are trying to get the $100k increased to $250k coverage. So if that is done, it could alleviate the spreading around a lot. Then as long as the China Deposit Insurance Corporation does not go under, you are ok.

LT

[JohnH]

#1 is good; that is, just as long as the U S gobment don't go belly up.

#3 is also good for an elderly person, single or not.

#4, use an LLC, cheaper to operate than a corporation; however.... if safety is the
principle concern, what would an LLC accomplish that spreading the risk won't among
7 banks? (Wachovia in Charlotte, maybe? grin)

My advice to one of my clients would be #3.

Harlan:
Right now they are using #3, so we're on the same page there.
I feel #1 is simpler and is the safest, but the return isn't as good. Lending directly to the Treasury takes the limits completely out of the picture. Also, if the gobment goes belly up, FDIC will already have gone into the tank so it wouldn't matter much at that point.
One reason for the concern is mergers - you can wind up with overlapping accounts when 2 institutions merge and you have a tight time window to get the accounts moved. The other is just the sheer number of institutions to keep up with, paperwork, different individual account reps at each bank, etc - 3 is better than 6 or 7. Plus, sometimes you can negotiate a little better rate if there's more money in a single institution under one person's control.

As for Wachovia, their problems have been one of the worst-kept secrets in this town for quite a while. (Lots of people whistling past the graveyard in recent months). I'm just glad it was a merger rather than a takeover. Incidentally, this client had moved money into Wachovia a few weeks ago at my urging, but stayed strictly under the limits per my instructions. So even if yesterday's news had been worse, they still would have been safe. (Nevertheless, I did get the phone call asking abut why I suggested Wachovia as one of the choices).

[JohnH]

Yes, and I saw that Obama said in a speech that the limits should be raised to $250K.
Nice idea, but it won't get me to vote for him.

[Nashville]

What are we going to do...

...when the only two banks left in the country are Bank of America and Citibank? Then no one will have more than $200,000 insured.

I for one hated to see Wachovia get sucked up. Not that they were personal bankers (talked about the weather with local farmers) but it's really bad when the whales start swallowing other whales instead of little fish.

fast forward to 2012, when the only two banks ARE in fact Bank of America and Citibank. They will apply for a merger and the gubbermint's Anti-Trust department will have a press release stating, "We approve this merger because we don't believe this one isolated incident will give rise to a monopoly. Even though there will be only one bank, we don't wish for our current action to be construed as a precedent. Any other banks will have the provisions of anti-trust strictly enforced"....

Sorta like the old song, "If the phone still ain't ringin', I assume it still ain't you...."

Remember the "Big Eight" accounting firms, anyone? How many are left? 3?? 4?? Power and influence continue to polarize at the top.

[joanmcq]

There are plenty of local banks doing responsible banking out there. Seek 'em out and give 'em your business.

[S T]

As I understand it

As I understand it, effective 10/3/08, the new FDIC coverage is now $250,000 for a single depositor. At least through 12/31/09.

I am anxious to see the web updates!

[JohnH]

Yes, I'm watching for the updates as well. I'm still unclear about whether the new limits apply across the board, or are there exceptions. I suppose we will know soon. Also, I unerstand that the $250K is temporary - only applies to 12/31/09.